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South Africa: Fiscal Regimes for Mining and Petroleum : Opportunities and Challenges

Author(s):
International Monetary Fund. Fiscal Affairs Dept.
Published Date:
September 2015
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I. Mining and Minerals in the South African Economy

The supplementary tables and figures presented here support the analysis of Chapters III and IV and V in the main report.

Figure A1.Mineral Sector Contribution to Exports

Source: Department of Minerals & Energy (Refer to Table A1)

Table A1.Mineral Sector Contribution to Exports
YearValue of mineral exportsTotal value of South Africa’s merchandise exportsMineral exports in % of total merchandise exports
R millionR millionPercent
200386,910291,43429.8
200489,673310,52528.9
2005102,487358,36128.6
2006138,879447,69031.0
2007162,203537,51630.2
2008221,926704,29331.5
2009176,390556,43231.7
2010224,956656,59734.3
2011282,013789,76435.7
2012269,120814,86133.0
2013278,658917,60230.4
Source: Department of Minerals & Energy (now Department of Mineral Resources)
Source: Department of Minerals & Energy (now Department of Mineral Resources)

Figure A2.Mining and Quarrying Sector Contribution to Total Government Revenue

Sources: Tax Statistics 2014, National Treasury & South African Revenue Service.

Figure A3.Employment by Sector

Source: Quarterly Employment Statistics & Stats SA (Refer to Table A2)

Table A2.Employment Sector(in percent)
YearConstructionMining and quarryingMining and quarrying of which:Electricity, gas and water supplyFinancial intermediation, insurance, real estateManufacturingTransport, storage and communicationWholesale, retail and motor trade;Community, social and personal
GoldNon-gold
20095.16.02.04.00.722.014.54.420.426.9
20104.86.11.94.30.722.014.14.420.427.5
20115.16.21.74.50.721.913.84.420.327.7
20125.06.11.74.40.721.813.64.520.228.0
20134.95.91.54.40.721.713.54.420.428.4
Source: Quarterly Employment Statistics & Stats SA
Source: Quarterly Employment Statistics & Stats SA

Figure A4.Mining Sector Return on Capital Employed (ROCE)

Source: Annual Financial Statistics 2014 & Stats SA (Refer to Table A3)

Table A3.Mining Sector Return on Capital Employed (ROCE)
200520062007200820092010201120122013
Net profit before company tax and dividendsR million17,82941,18485,972109,567108,86640,62385,79397,32837,309
Total equity and liabilitiesR million298,068322,249424,547525,183650,314709,320799,623940,9811,049,159
ROCE%6.012.820.320.916.75.710.710.33.6
Source: Annual Financial Statistics 2014, Stats SA
Source: Annual Financial Statistics 2014, Stats SA

Figure A5.Weighted Average Annual Growth Rate of Unit Labor Costs 2000-2013

Source: Department of Labour & Stats SA (Refer to Table A4)

Table A4.Unit Labor Costs by Industry
YearMining and QuarryingManufacturingAll industries
Index 2005=100Index 2005=100Index 2005=100
200076.2484.2680.62
200184.2385.1482.34
200291.8590.1986.48
200390.0594.6891.32
200494.5396.8996.00
2005100.00100.00100.00
2006118.25103.16103.57
2007139.14116.49112.74
2008176.57125.96121.60
2009201.90142.14133.10
2010213.99152.40143.44
2011240.63163.39154.70
2012274.69176.60165.37
2013297.36190.20176.11
Weighted average annual growth rate (%)
2000-201311.886.826.47
Source: Department of Labour and Stats SA
Source: Department of Labour and Stats SA

Figure A6.Approved Electricity Price Increases in Percent

Source: Eskom (Refer to Table A5)

Table A5.Average Approved Electricity Tariff Increase in Percent vs. SA Headline Inflation (Consumer Price Index)
YearAverage approved tariff increase %CPI %
19881012.89
19891014.51
19901414.29
1991815.57
1992913.67
199389.87
199478.82
199548.71
199647.32
199758.62
199856.87
19994.55.21
20005.55.37
20015.25.7
20026.29.2
20038.435.8
20042.51.4
20054.13.42
20065.14.6
20075.95.2
200827.56.6
200931.36.16
201024.85.4
201125.84.5
2012165.7
201386
Source: Eskom
Source: Eskom
Table A6.Foreign Investment in SA’s Mining and Quarrying Industry (R millions)
200020012002200320042005200620072008200920102011
Total direct investmentR millions91540124063n.a.103093111639168271250361332254195365289836388772n.a.
% of GDP9.711.9n.a.7.87.610.313.615.88.211.614.1n.a.
Total portfolio investmentR millions7208367604n.a.948716198398880122233186093160623165539288055n.a.
% of GDP7.66.5n.a.7.24.26.06.68.86.86.610.5n.a.
Total other investmentR millions47187258n. a.42704679524047464738554653575347n.a.
% of GDP0.50.7n.a.0.30.30.30.30.20.20.20.2n.a.
Total foreign liabilitiesR millions168341198925n.a.202234178301272391377340523085361534460732682174n.a.
% of GDP17.819.0n.a.15.312.116.620.524.815.318.424.8n.a.
Source: Quaterly Bulletin, South African Reserve Bank (SARB)Note: n.a. indicates missing data
Source: Quaterly Bulletin, South African Reserve Bank (SARB)Note: n.a. indicates missing data

Figure A7.South Africa: Indices of Mineral Production (volume) by Commodity, 1990=100

Source: Department of Mineral Resources (DMR)

Figure A8.Mineral Sales Composition (Selected Minerals’ Contribution to Total Mineral Sales in 2013)

Source: Stats SA

Figure A9.Composition of Mineral Sales, 1980-2013

Source: Stats SA

Figure A10.Contribution of Mining Sector to Total GDP, 1993-2013

Source: Stats SA

Figure A11.South Africa: Mining’s Contribution to Employment and Wages (%), 2002-2012

Source: Stats SA & Department of Mineral Resources (DMR)

Economic Significance of Mining

1. South Africa has exploited its mineral riches for more than a century. Large volumes of gold, diamonds, coal and platinum-group metals (PGMs) have been extracted and the sector has contributed significantly to the development of the SA economy. The mineral extraction industry is mature, with some sectors in decline (gold and diamonds), but the sector remains resilient as its domestic suppliers of goods and services are technical, highly capable and resourceful. The well-established domestic technical backward linkages have inherent growth potential if their services were to be exported—constituting a similar value addition as is pursued under the beneficiation program. In addition, South Africa’s deep capital markets co-finance the development of new mines.

2. The country is a dominant world supplier for a range of minerals at consistently high quality. These include chrome, platinum group metals (PGMs), manganese, vanadium, ilmenite, rutile and zirconium. It is the world’s third largest coal exporter. In 2014, some 55 different minerals and aggregates were extracted by approximately 1,700 mines, of which 54 produced gold, 54 produced platinum-group metals and other byproducts, 146 produced coal (anthracite and bituminous), 390 produced diamonds in mines and alluvial diggings, and 14 extracted iron ore. South Africa holds the world’s largest reserves of PGMs (over 80 percent of world known reserves), manganese (80 percent), chromium (72 percent), gold (40 percent), and alumino-silicates plus significant reserves of titanium, vanadium, zirconium, vermiculite and fluorspar.1 Gold mining production is on a declining trend since 2000 (Figure A7 shows historical trends in mineral production). In 2013, the country’s mineral sales (Figures A8 and A9) were dominated by coal (R101.6 billion); PGMs (R83.9 billion); iron ore (R63.7 billion) and gold (R58.2 billion).

3. Mining’s contribution to the economy is significant (see Figures A1, A10 and A11): in 2013, it accounted for 1.35 million jobs or 5.9 percent of formal sector jobs (520,000 direct and perhaps 830,000 indirect), and for about 18 percent of GDP, 7.8 percent direct and 10 percent indirect, but still revealing a long-term decline (Figure A10). Mining is an important employer by spending R93.6 billion on wages and salaries (Figure A11). Remarkably, mining employment as a percent of the total economically active population has been constant at an average of 2.8 percent for the period 2003-2013 (Figure A11). Moreover, mine wages as a percent of total mining revenue has been relatively stable over the identical period, averaging 24.3 percent per year. Minerals are responsible for more than 30 percent of foreign exchange earnings through exports; mining is a significant procurer of local goods and services (R389 billion); capital formation by mining remains robust as it shifts towards increasing mechanization with total fixed investment remaining above 11 percent of GDP since 2009.

Revenue importance

4. For the period 2008 to 2013 the ratio of total tax and non-tax revenue from mining (CIT and since 2010 mineral royalties) to total mineral sales averaged 5.8 percent. For the period 1990 to 1997, the ratio of mining taxes to mineral sales averaged nearly 4 percent. This ratio increased to 5.6 percent over the period of 2000 to 2005. The latter period was characterized by robust commodity prices, a marked decline in gross fixed capital formation by the mining industry in 2004 to 2005, and a one percent reduction of the corporate income tax rate to 29 percent in 2005. The CIT rate was further reduced to 28 percent in 2008.2 For the period 2010-14 annual dividend distributions from mining exceeded CIT-royalty payments in 3 out of 5 years (Table A7).

Table A7.South Africa: Mining Companies’ Value Distribution, 2010-2014
Value Distributed in Percent20142013201220112010
Funds reinvested3441273243
Employees3838273036
Shareholder dividends1119201112
Total CIT + royalty1314131210
Direct taxes91010119
Employee taxes77666
Mining royalties44311
Borrowings43235
Community investments111n/an/a
Funds (utilised)/ retained−8.00−2346−12
Total value created100100100100100

Comparatives were taken from PWC 2013 publication to illustrate the cycle impact

Source: PwC analysis

Comparatives were taken from PWC 2013 publication to illustrate the cycle impact

Source: PwC analysis

II. Economic Assessment of Mining Fiscal Regimes

5. Economic modeling was undertaken on stylized platinum, iron ore and coal projects representing the most active precious metals and bulk mineral segments of the current South African mining sector.Boxes A2, A3 and A4 present the underlying project economics of the mine examples used. These are stylized full-cycle projects intended to be representative of a ‘typical’ South African mine in each mineral group. All simulations in this section are performed using FAD’s Fiscal Analysis of Resource Industries (FARI) modeling framework.

6. South Africa’s current regime and two possible alternative fiscal regime scenarios were evaluated.Table A8 presents the key terms of each of the scenarios. Scenario 1 presents the complete reform of the major elements of the fiscal regime, introducing a flat-rate royalty, reforms to the corporate income tax system involving a 10 percent ACC and 5 year depreciation period using the straight line method, as well as an additional cash flow surcharge. Under Scenario 1(a) the royalty is creditable against the cash flow surcharge, while in Scenario 1(b) it is not. Scenario 2 presents the proposed marginal reform, largely maintaining the status quo and simply applying the ACC while disallowing deductibility of interest expenses.

Table A8.Mining - Current Fiscal Regime and Possible Reform Scenarios
Fiscal provisionCurrent RegimeScenario 1 (a)Scenario 1 (b)Scenario 2
Royalty
Refined Minerals0.5 + [EBIT/(gross sales in respect of refined mineral resources x 12.5)] x 100. Maximum rate of 5%2% Flat Rate, creditable against Cashflow Surcharge paid in a given year2% Flat Rate0.5 + [EBIT/(gross sales in respect of refined mineral resources x 12.5)] x 100. Maximum rate of 5%
Unrefined Minerals0.5 + [EBIT/(gross sales in respect of refined mineral resources x 9)] x 100. Maximum rate of 7%2% Flat Rate, creditable against Cashflow Surcharge paid in a given year2% Flat Rate0.5 + [EBIT/(gross sales in respect of refined mineral resources x 9)] x 100. Maximum rate of 7%
Royalty BaseGross SalesGross SalesGross SalesNet Smelter Return
Income tax28%28%28%28%
DepreciationImmediate Expensing of all Capital ExpenditureStraight Line Depreciation over 5 years from Production Year 1Straight Line Depreciation over 5 years from Production Year 1Immediate Expensing of all Capital Expenditure
Allowance for Corporate Capital10% uplift on balance of unredeemed capital10% uplift on balance of unredeemed capital10% uplift on balance of unredeemed capital
Loss carry-forwardUnlimitedUnlimitedUnlimitedUnlimited
Additional TaxCashflow Surcharge at 20% with uplift on capital expenditure at 15%Cashflow Surcharge at 20% with uplift on capital expenditure at 15%
HDSA Requirements26% Local Ownership26% Local Ownership26% Local Ownership26% Local Ownership
Withholding Taxes:
Dividends15% (reduced to 5% in treaties)15% (reduced to 5% in treaties)15% (reduced to 5% in treaties)15% (reduced to 5% in treaties)
Interest15% (reduced to 0% in treaties)15% (reduced to 0% in treaties)15% (reduced to 0% in treaties)15% (reduced to 0% in treaties)

Box A1.Cash flow Surcharge and ACC

Allowance for Corporate Capital (ACC) surcharge scheme. The ACC permits an annual uplift on the balance of undepreciated capital assets. Actual interest paid is not deductible. The ACC, therefore, creates neutrality between debt and equity financing, and should make the investor indifferent as to the rate of tax depreciation (since faster depreciation diminishes the amount of ACC deductible).

Tax surcharge on cash flow. An adjustment is made to taxable income by adding back depreciation and interest, and deducting any capital expenditure in full. This yields a base of net cash flow for each year. A simple uplift (investment allowance) is added to capital costs at the start. The surcharge is then deductible from taxable income in the computation of corporate income tax.

7. The current and proposed regimes were assessed under a number of simplifying assumptions. It is assumed in each case that the HDSA ownership requirements of the Mining Charter are fulfilled through a 26 percent unpaid equity shareholding in the company. Dividends payable to shareholders of the local HDSA entity are not subject to withholding tax, as per Section 64(f) of the Income Tax Act. For the primary investor, a dividend withholding tax of 5 percent is applied and interest withholding tax is assumed to be 0 percent, as reduced by a large number of South Africa’s existing tax treaties. To cover decommissioning and rehabilitation costs at the end of the project life, it is assumed that the joint venture makes tax-deductible contributions to a decommissioning fund once 50 percent of the projected reserves have been depleted. It is assumed that 75 percent of development costs are financed using debt, at an interest rate of LIBOR + 3 percent.

Evaluation of Results

8. The current regime and proposed alternatives were evaluated against the key fiscal objectives of revenue-raising capacity, neutrality and progressivity, and placed in international context of other mineral-producing countries3. Results of the analysis for the platinum, iron ore and coal projects are presented in Boxes A2, A3 and A4. Simulation results assume full and immediate distribution of dividends as profits are made; in reality, the company might decide to distribute only part of the profits obtained in a year or delay the payment to a future date. Moreover, the simulation results may overstate effective tax rates as not all sources of revenue erosion are captured (e.g., through weak administration). The fiscal terms of comparator countries are included in Tables A36, A37 and A38 of this supplement.

9. The current fiscal terms and reform scenarios were evaluated for revenue generating capacity using the Average Effective Tax Rate (AETR) or “government take”. The AETR is calculated over project life as the ratio of the present value of government revenue from a profitable project to the present value of the pre-tax net cash flow stream it generates. The AETR can be expressed both in undiscounted and discounted values, the latter to account for the time value of money. Table A12, A16 and A20 illustrate that the current regime generates an undiscounted AETR of between 36 and 40 percent for each of the projects while Figures A17, A27 and A38 show the profile of revenues relative to the pre-tax project cash flow over the project life. While the concessional financing of the BEE entity is assumed not to form part of the direct government take, it is clear that the HDSA local ownership requirements has an impact on the non-BEE investor’s cashflow and return. If this is reflected as a contribution to government take, the AETR increases to between 55 and 57 percent under the current regime.

10. The complete reform scenarios (Scenario 1(a) and 1(b)) improve the take of the regime through the introduction of the cash flow surcharge. A range of cost and price assumptions were used to understand the responsiveness of the AETR and investor IRR to these parameters, as well as to assess the range of scenarios which would be economically viable under the current and proposed reform scenario (Figures A14, A24 and A35). The reform scenarios also place South Africa well in the range of international comparators (Figures A15, A25, and A36).

11. The revenue pattern over the cycle of the project under each scenario mainly reflects the production profile. The cash flow surcharge has the effect of generating significant additional revenue once the project is generating sufficient positive cash flow, the effect of which is slightly reduced when the royalty is creditable against the surcharge. The 5 year depreciation profile has the effect of altering the timing of corporate tax payments in the early years of production (Figure A43). The marginal reform scenario has little impact on government revenue, with the ACC providing some additional relief to the investor in the initial years of production when capital depreciation deductions are made in determining the corporate income tax payable. Disallowing interest deductions under this scenario has the effect of slightly increasing the overall AETR.

12. A key indicator of the effect on a marginal project is the “breakeven price” or the minimum primary mineral price required by the investor to meet its hurdle rate. The price is expressed in constant values and the hurdle rate is assumed in the analysis at 12.5 percent in post-tax real terms. An alternative indicator to measure the burden on a marginal investment is the Marginal Effective Tax Rate (METR). The METR illustrates the relative fiscal wedge taken from the project by the fiscal regime at the margin of project viability. The reform scenarios score well for investment incentive when placed in international perspective. Under the current regime the METR is slightly lower than under the reform scenarios; however, given the similarity in break-even prices (Figures A19, A30 and A41), the difference in the METR among these regimes is not significant.

13. The progressivity of the fiscal regimes was evaluated by estimating the government share of total benefits4over a range of project results. “Progressivity” here means the capacity of the fiscal regime to ensure that government receives a rising share of project cash flows as the intrinsic profitability of the project increases (up to a realistic maximum share) while bearing part of the downside when projects are less profitable. It shows how the government can approach higher taxation of realized rents, even if taxing all of them is not possible. Variation in project net present value (reflecting project profitability) was generated by adjusting the price of the primary commodity (platinum, export coal and iron ore) in constant real terms. At low profitability levels, all the scenarios place a lower burden on projects with lower pre-tax profitability. With the additional progressive fiscal elements, the recommended scenarios yield a higher share of total benefits for the government as the profitability of the project increases (Figures A20, A29 and A40).

14. The impact of commodity price uncertainty on project outcomes was evaluated using stochastic price analysis. Monte Carlo simulations were used to account for uncertainty surrounding future mineral prices by assuming that prices follow a stochastic stationary first-order autoregressive (AR(1)) process. The results were then used to measure the dispersion of possible outcomes, and infer the implied risk to the investor and the government under the current regime and reform scenarios. Details of the estimation of the parameters of this process are described in Box A5.

15. Investor and government risk is evaluated by analyzing the mean and coefficient of variation (CV) of investor returns and government revenue.Figures A21, A31 and A42 show the mean expected post-tax IRR and the CV of post-tax IRR for each regime tested. These results further demonstrate that the recommended scenarios place South Africa well when compared internationally. Relative to the sample, the proposed regimes generate high mean post-tax IRRs, and do not appear to significantly increase the risk to the investor or government.

16. The revenue benefit from the full reform program (Option 1) is likely to be greater than simulated here. The modeling assumes an accurate interpretation of the current regime, and full collection under it. In view of the complexities and distortions that prevail, full collection under a cleaned-up legal framework should already be greater. The combination of reform and a simplified legal framework has a high chance of bringing revenue increases in the medium term.

Box A2.Stylized Platinum Project

Platinum mines in South Africa have a range of varied scale, depth, labor-capital intensity and ‘prill split’ of the different platinum group metals contained in the ore, each of which would have an impact on project economics. The mine presented here has been stylized to reflect a moderately capital intensive mine with a relatively favorable mineral split, and to capture the high operating costs in the platinum sector driven by increasing labor and electricity costs.

Table A9.Project Parameters
Data in $mm 2015 terms
Project IndicatorUnit
ProductionYears19
Platinum000 oz1,754
Palladium000 oz1,087
Rhodium000 oz272
Gold000 oz28
Capital Costs$ million481
Sustaining Capital$ million180
Operating Costs - Mining$ million1,414
Operating Costs - Processing$ million565
Decommissioning$ million60
Unit Capex$/oz229
Unit Opex$/oz630
Total Unit Cost$/oz859
Source: IMF Staff Estimates
Source: IMF Staff Estimates

Figure A12.Project Net Cash Flow

Figure A13.Historical Trends of PGM and Gold Prices ($/oz)

Source: IMF WEO and Bloomberg

Recent declines in the prices of platinum group minerals have contributed to lower profitability in the mining sector (Figure A13). However, while near-term downside risk is high, the long term industry price outlooks for PGM and gold prices appears to be positive. Long-term industry price outlooks shared with the mission reach levels as high $1700/oz for platinum, $870/oz for palladium, $2400 for rhodium and $1300/oz in the case of gold over the long-term (real terms).

Table A10.PGM and Gold Price Forecasts
Forecast
Spot 5/20152016201720182019
Bloomberg 1/
PlatinumUS$/oz115912881445153816121640
PalladiumUS$/oz767834884910917895
Rhodium 2/US$/oz115014581676n.an.an.a
GoldUS$/oz119812111192123812891342
WEO
Gold (real terms) 3/US$/oz119811801172118712061229
Gold (nominal terms) 4/US$/oz119811801192123812891342

Nominal terms; average of 22 to 27 financial analysts (Jan-Apr 2015) forecasts for all but Rhodium.

Rhodium forecast as reported by Bloomberg, individual analysts forecasts not available

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

Nominal terms; average of 22 to 27 financial analysts (Jan-Apr 2015) forecasts for all but Rhodium.

Rhodium forecast as reported by Bloomberg, individual analysts forecasts not available

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

The base case price assumptions used in the analysis reflect a more conservative interpretation of these long term price outlooks, in line with medium-term IMF WEO and Bloomberg forecasts (Table A11). Given these assumptions, the project generates a pre-tax project rate of return of 19 percent in 2015 real terms.

In addition, the analysis includes sensitivity testing on a range of constant real terms price assumptions, as well a stochastic price paths generated based on trends from historical price data.

Table A11.Price Assumptions and Project Economics
Price Assumptions (2015 real terms)
Platinum$/oz1,600
Palladium$/oz850
Rhodium$/oz1,600
Gold$/oz1,200
Project Economics(2015 real terms)
Project NCF (NPV0)$ million1,500
Pre-Tax Project IRR%19%
Table A12.Simulation Results
Project Fiscal Results (in US$ million real or %)Current RegimeScenario 1 (a): Flat Rate Royalty, ACC and Cashflow Surcharge (Creditable Royalty)Scenario 1 (b): Flat Rate Royalty, ACC and Cashflow SurchargeScenario 2: Variable Royalty and ACC
Pre-tax project IRR19.5%19.5%19.5%19.5%
Post-tax IRR on total funds15.6%14.9%14.512%15.4%
Post-tax IRR on equity22.7%21.6%21.0%22.3%
Post-tax IRR on equity (non-BEE)18.1%16.9%16.3%17.7%
Pre-tax NCF undiscounted1,5001,5001,5001,500
Post-tax investor NCF undiscounted862768723848
o/w Post-tax BEE NCF undiscounted277252240273
Government revenue undiscounted549644689564
AETR undiscounted36.6%42.9%45.9%37.6%
AETR including BEE NCF55.1%59.8%62.0%55.8%
Pre-tax NCF 10% discount246246246246
Post-tax investor NCF 10% discount146126117141
o/w BEE investor NCF 10% discount65615864
Government revenue 10% discount121141151126
AETR 10% discount49.3%57.4%61.4%51.4%
AETR including BEE NCF75.9%82.0%84.9%77.4%

Figure A14.Government Take and Investor IRR

Price variations were applied to all commodity prices; the platinum price is presented here for illustration purposes. Red areas depict unviable project outcomes (for the post-tax IRR this assumes an investor hurdle rate of return of 12.5 percent (post-tax real)).

Figure A15.Average Effective Tax Rate

Figure A16.Government Revenue Profile

Figure A17.Revenue Profile: Current Regime

Figure A18.Revenue Profile: Scenario 1 (a)

Figure A19.METR and Breakeven Price

Figure A20.Government Share of Benefits

In undertaking stochastic price analysis, Monte Carlo simulations were used to account for uncertainty surrounding future prices by assuming that prices follow a stochastic stationary first-order autoregressive (AR(1)) process. The results were then used to measure the dispersion of possible outcomes, and infer the implied risk to the investor and the government under the current regime and reform scenarios.

The implicit long-term average prices implied by the autoregressive function (see Box A5 below for estimation methodology) for the PGMs are significantly lower than current levels in the case of platinum, palladium and gold, and than those used in the base case analysis in Table A9. These AR(1) price functions and associated long term prices therefore yield unviable outcomes under the cost circumstances as assumed in the base case example. To illustrate the impact of the regimes on investor uncertainty on a viable project, the costs assumed for the stochastic analysis were reduced by 25 percent, amounting to a unit cost of $630/oz.

Table A13.Stochastic Analysis Results
Mean Investor post tax IRRCoefficient of variation of IRRTax Induced Probability of below target return of 12.5%Mean Government NPV10Coefficient of variation of government
%%%$mm%
Project before tax18.835.1n/an/an/a
After tax
Canada; Ontario15.636.116.107056
South Africa; Current Regime14.938.315.208054
South Africa; Scenario 214.639.717.508551
South Africa; Scenario 1 (a)14.338.116.809157
South Africa; Scenario 1 (b)13.639.921.6010254
Russia; Current Regime13.546.131.3010139
United States; Montana13.140.828.3010748
Zimbabwe ; Current Regime11.348.141.5013650

Figure A21.Mean Investor IRR and Risk of below Hurdle Rate Investor Return

Box A3.Stylized Coal Project

The mine presented here has been stylized to reflect a medium-sized coal mine producing 7-8 mtpa of saleable product, reflective of the typical scale and cost structure of coal projects in South Africa.

A key factor determining project economics will be the government’s policy on coal as a strategic mineral, and the extent and pricing of domestic supply requirements. Reflective of a number of current projects, it is assumed that 50% of coal is sold to Eskom, the primary buyer of domestic coal, for power generation at $25 per tonne. It is understood that these prices are negotiated with Eskom in the form of medium to long-term fixed price contracts for domestic supply. The remaining 50% of coal production is assumed to be washed, processed and sold for export at international market prices, transported by the existing rail and port infrastructure.

Table A14.Project Parameters
Data in $mm 2015 terms
Project IndicatorUnit
ProductionYears21
Coal Domestic000 tonnes73,074
Coal Export000 tonnes73,074
Capital Costs$ million207
Sustaining Capital$ million230
Operating Costs - Mining$ million4,165
Operating Costs - Processing$ million219
Decommissioning$ million39
Unit Capex$/tonne3
Unit Opex$/tonne30
Total Unit Cost$/tonne33
Price Assumptions(2015 real terms)
Coal Export$/tonne57
Coal Domestic$/tonne25
Project Economics (2015 real terms)
Project NCF (NPV0)$ million911
Pre-Tax Project IRR%21%
Source: IMF staff estimates
Source: IMF staff estimates

Figure A22.Project Net Cash Flow

Recent declines in coal export prices have contributed to lower profitability in the sector (Figure A23). An export price of $57/ton in 2015 terms is assumed and kept constant in real terms throughout the project cycle. This price represents the current medium-term forecast of the IMF WEO for South African export coal, reflective of current and further anticipated slowdown in world coal demand, particularly in South Africa’s main markets of India and China. Given these assumptions, the project generates a pre-tax project rate of return of 21% in 2015 real terms. Project cost parameters have been calibrated to reflect the South African cost environment, but also to reflect the cost levels which would be necessary for a commercially viable project under the current international and domestic price constraints.

Recognizing inherent uncertainty regarding the future coal price and extraction cost environment, the analysis also includes sensitivity testing on a range of constant real terms price and unit cost assumptions, as well stochastic price paths generated based on trends from historical coal price data.

Table A15.South African Coal Export Price Forecasts
Forecast
South African coal export priceSpot 4/20152016201720182019
Bloomberg 1/US$/tonne58.9063.3865.4567.4577.7675.20
WEO (real terms) 2/US$/tonne58.9059.2457.0857.0857.0857.08
WEO (nominal terms) 3/US$/tonne58.9059.2458.0659.5560.9762.36

Average of 4 financial analysts forecasts (Dec 2014-Apr 2015)

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

Average of 4 financial analysts forecasts (Dec 2014-Apr 2015)

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

Figure A23.Historical and Forecast South African Coal Export Price

Source: IMF WEO and Bloomberg

Table A16.Simulation Results
Project Fiscal Results (in US$ million real or %)Current RegimeScenario 1 (a): Flat Rate Royalty, ACC and Cashflow Surcharge (Creditable Royalty)Scenario 1 (b): Flat Rate Royalty, ACC and Cashflow SurchargeScenario 2: Variable Royalty and ACC
Pre-tax project IRR20.6%20.6%20.6%20.6%
Post-tax IRR on total funds15.7%15.4%14.4%15.6%
Post-tax IRR on equity23.2%22.8%21.1%23.0%
Post-tax IRR on equity (non-BEE)18.7%18.3%16.7%18.5%
Pre-tax NCF undiscounted911911911911
Post-tax investor NCF undiscounted491471403490
o/w Post-tax BEE NCF undiscounted150144126149
Government revenue undiscounted370390458372
AETR undiscounted40.6%42.8%50.3%40.8%
AETR including BEE NCF57.1%58.6%64.1%57.2%
Pre-tax NCF 10% discount167167167167
Post-tax investor NCF 10% discount89846888
o/w BEE investor NCF 10% discount37353137
Government revenue 10% discount909511191
AETR 10% discount53.9%57.1%66.4%54.8%
AETR including BEE NCF76.1%78.3%85.2%76.7%

Figure A24.Government Take and Investor IRR

Figure A25.Average Effective Tax Rate

Figure A26.Government Revenue

Figure A27.Revenue Profile Current Regime

Figure A28.Revenue Profile Reform Scenario 1(a)

Figure A29.Government Share of Benefits

Figure A30.METR and Hurdle Price

Table A17.Stochastic Analysis Results
Mean Investor post tax IRRCoefficient of variation of IRRTax Induced Probability of below target return of 12.5%Mean Government NPV10Coefficient of variation government
%%$mm%%
Project before tax21.36420%n/an/a
After tax
China; Current16.370188079
South Africa; Current Regime15.177239675
South Africa; Scenario 215.078239775
Australia; Victoria14.779249363
South Africa; Scenario 1 (a)14.0822711071
South Africa; Scenario 1 (b)13.3843012071
Kazakhstan; 2013 Income Tax Law13.1762911881
Australia; Queensland12.8833111968
Russia; Current Regime12.4983513044
United States; Wyoming (Coal)11.61043714743
Australia; New South Wales8.21305118835
Colombia ; CIT and Royalty7.81375220035
Indonesia ; Current (2009 law)7.11425420838

Figure A31.Mean Investor IRR and Risk of below Hurdle Rate Return

Under the current regime and Scenarios 1(a) and (b), the royalty rate is applied to gross sales, without deduction of transport or refining costs between the mine and the point of transfer. Under Scenario 3, the net smelter return principle is used, allowing transport and refining costs to be deducted from the royalty base.Price variations were applied to both the domestic and export coal prices; the export price is presented here for illustration purposes. Red areas depict unviable project outcomes (for the post-tax IRR this assumes an investor hurdle rate of return of 12.5 percent (post-tax real)).Note: Figure A24 shows that for the current project example and associated profitability levels would be commercially unviable under certain international regimes (Indonesia, Colombia, and Australia (New South Wales)).Note: Stochastic price analysis was carried out on export coal prices; domestic coal prices were held constant in real terms at $25/tonne.

Box A4.Stylized Iron Ore Project

The South African iron ore sector is dominated by the 37 mtpa Sishen iron ore mine, the largest mining asset of the Kumba Iron Ore project. A number of smaller mines brought the total South African iron ore production to approximately 72 mtpa per annum in 2013.

The full-cycle project presented here has been stylized to reflect the scale of the Sishen iron ore mine, based on its current estimated 18-19 year remaining mine life. The mine produces 37 mtpa of 64-66% Fe iron ore in the form of both lump and fines. Although in practice a small proportion of South African iron ore is sold domestically, it is assumed in this example that iron ore is produced entirely for export. Any domestic supply obligations and the associated prices would of course have an impact on project profitability.

It is assumed that the iron ore is washed, crushed and processed before being transported using existing rail and port infrastructure. The costs assumed are informed by industry reports, and have also been calibrated to reflect the costs levels which would be necessary for a project to be commercially viable in the current price environment.

Table A18.Project Parameters
Project IndicatorUnit
Production PeriodYears18
Production - Iron Ore000 tonnes569,000
Capital Costs$ million3,294
Sustaining Capital$ million4,206
Operating Costs - Mining$ million7,682
Operating Costs - Transport/Processing$ million5,377
Decommissioning$ million329
Unit Capex$/tonne13
Unit Opex$/tonne24
Total Unit Cost$/tonne37
Source: IMF staff estimates
Source: IMF staff estimates

Figure A32.Project Net Cash flow

Price Assumptions

Recent declines in the iron ore have contributed to lower profitability in the sector, with outlooks for iron ore prices relatively pessimistic (Table A19). Figure A33 shows the historical price of China CFR 62% Fe fines. The determination of the actual sales price of South African ore would include a deduction for freight costs to the reference price location. Trends in shipping costs have been downwards with recent rates for shipping iron ore from Richards Bay to China at $7/ metric ton (Figure A34).

Table A19.Iron Ore Export Price Forecasts
Forecast
China CFR Fines 62% FeSpot 4/20152016201720182019
Bloomberg (Average Forecast) 1/US$/tonne50.8067.7171.6172.3275.5378.34
WEO (real terms) 2/US$/tonne50.8062.7160.8560.8560.8560.85
WEO (nominal terms) 3/US$/tonne50.8062.7161.9063.4965.0166.48

Average of 17 financial analysts forecasts (Jan-Apr 2015)

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

Average of 17 financial analysts forecasts (Jan-Apr 2015)

Last updated on March 19, 2015.

Nominal terms, adjusted using WEO inflation projections; last updated on March 19, 2015.

As on April 14, 2015

Figure A33.Historical Price and Forecasts

Source: WEO and Bloomberg

Figure A34.Iron Ore Freight Rates

Source: Bloomberg

The analysis assumes an iron ore price of $55/ton in constant real terns 2015, reflecting a freight cost deduction from the WEO forecast of $60, but also an upwards adjustment to reflect the higher Fe content of iron ore from the Sishen mine. Given these assumptions, the project generates a pre-tax project rate of return of 19% in 2015 real terms.

Table A20.Simulation Results
Project Fiscal Results (in US$ million real or %)Current RegimeScenario 1 (a): Flat Rate Royalty, ACC and Cashflow Surcharge (Creditable Royalty)Scenario 1 (b): Flat Rate Royalty, ACC and Cashflow SurchargeScenario 2: Variable Royalty and ACC
Pre-tax project IRR19.2%19.2%19.2%19.2%
Post-tax IRR on total funds14.8%14.5%14.1%14.6%
Post-tax IRR on equity22.0%21.8%21.1%21.6%
Post-tax IRR on equity (non-BEE)17.9%17.7%17.0%18.1%
Pre-tax NCF undiscounted10,40710,40710,40710,407
Post-tax investor NCF undiscounted5,6195,3314,9915,498
o/w Post-tax BEE NCF undiscounted1,7501,6631,5711,717
Government revenue undiscounted4,1004,3884,7284,222
AETR undiscounted39.4%42.2%45.4%40.6%
AETR including BEE NCF56.2%58.1%60.5%57.1%
Pre-tax NCF 10% discount1,8121,8121,8121,812
Post-tax investor NCF 10% discount1,001937856957
o/w BEE investor NCF 10% discount429407385418
Government revenue 10% discount1,0041,0671,1481,047
AETR 10% discount55.4%58.9%63.4%57.8%
AETR including BEE NCF79.1%81.4%84.7%80.8%

Figure A35.Government Take and Investor IRR

Figure A36.Average Effective Tax Rate

Figure A37.Government Revenue

Figure A38.Revenue Profile Current Regime

Figure A39.Revenue Profile Reform Scenario 1(a)

Figure A40.Government Share of Benefits

Figure A41.METR and Hurdle Price

Table A21.Stochastic Analysis Results
Mean Investor post tax IRRCoefficient of variation of IRRTax Induced Probability of below target return of 12.5%Government NPV10Government revenue coefficient of variation
%%%$mm%
Project before tax37.341.4n/an/an/a
After tax
Canada; Ontario15.942.43.4241754.3
Canada; Saskatchewan15.742.63.5251154.1
China; Current15.442.83.6254553.4
Canada; Northwest Territories15.242.74.0278854.2
Russia; Current Regime15.044.04.7255650.7
South Africa; Current Regime14.843.44.5281553.7
Chile; Current Regime14.643.45.4287152.3
South Africa; Scenario 214.643.85.1286952.9
South Africa; Scenario 1 (a)14.542.85.2327655.2
Brazil; Current Regime14.544.95.8237247.0
Canada; Manitoba14.443.55.8308953.1
Canada; Quebec14.343.66.0329553.5
South Africa; Scenario 1 (b)14.143.25.8344054.7
United States; Nevada13.944.46.6322551.6
Canada; Newfoundland13.844.26.4321151.9
Australia; South Australia13.646.16.6286648.1
United States; Arizona13.544.96.9329651.0
Kazakhstan; 2013 Income Tax Law13.440.26.3450858.8
Australia; Western Australia12.347.58.2324145.8
Guinea; 2013 Revision (current)12.046.17.7401451.6

Figure A42.Mean Investor IRR and Risk of below Hurdle Rate Return

Under the current regime and Scenarios 1(a) and (b), the royalty rate is applied to gross sales, without deduction of transport or refining costs between the mine and the point of transfer. Under Scenario 3, the net smelter return principle is used, allowing transport and refining costs to be deducted from the royalty base.Red areas depict unviable project outcomes, assuming an investor hurdle rate of return of 12.5 percent (post-tax real).Note: A $10 discount was applied to the stochastic price to reflect the transportation costs from South Africa to the reference market.

Box A5.Stochastic Price Simulations

This box explains the autoregressive model (i.e. the price today helps predict the price tomorrow) used to generate the stochastic mineral price simulations used in this section.

Table A22.Data for Stochastic Analysis
MineralData SourceTime Period
PlatinumBloomberg: Platinum Spot Price in USD per troy ounce, in plate or ingot form, with a minimum purity of 99.95%1987-2014
PalladiumBloomberg: Platinum Spot Price in USD per troy ounce, in plate or ingot form, with a minimum purity of 99.95%1993-2014
RhodiumBloomberg: Rhodium Spot Price in USD per troy ounce, in plate or ingot form, with a minimum purity of 99.95%1987-2014
GoldWEO: Gold, Fixing Committee of the London Bullion Market Association, London 3 PM fixed price, US$ per troy ounce1969-2014
CoalWEO: Coal, South African export price, US$ per metric tonne1990-2014
Iron OreWEO: Iron Ore, China import Iron Ore Fines 62% FE spot (CFR Tianjin port) US$ per metric ton1975-2014

These prices were adjusted annually for US inflation, using 2014 as the base year, and then normalized by taking natural logarithms.

Autoregressive (AR) model

It is assumed that real commodity prices follow an autoregressive process given by:

where yt is the commodity price in real terms defined above, α and β are parameters relating the current price to its past value, and et is a stochastic error term distributed normally with zero mean and variance σ2. Parameters of the model are estimated by OLS, yielding the parameters detailed in Table A23.

Table A23.Parameters for Stochastic Analysis
MineralConstant (α)Coefficient (β)Standard Deviation of Residuals (σ2)Implied Long Term Average Price (US$)Starting Price assumed in analysis (US$)
Platinum0.380.950.151,0511,600
Palladium1.430.770.32519850
Rhodium1.880.760.541,6901,600
Gold0.720.890.209201,200
Coal0.990.760.256057
Iron Ore0.050.990.1914855

Stochastic simulations

In stochastic simulations, future prices are generated recursively using this equation. Starting prices were assumed as detailed in Table A23, and with error terms randomly generated (using a normal distribution with parameters reported in Table A23). Additionally, lower and upper bounds on prices are imposed to avoid extreme values. This exercise is repeated multiple times to construct a range of possible outcomes for future price paths.

Source: Philip Daniel, Michael Keen, and Charles McPherson, 2010, The Taxation of Petroleum and Minerals: Principles, Problems and Practice, (Abingdon: Routledge).

Effect of Proposed Changes to Depreciation

17. The treatment of capital depreciation under the current and proposed regimes was further analyzed. A comparison was made between the treatment of depreciation under the current regime, proposed reform scenario, and the system of general business taxation in South Africa. The general taxation scenario assumes that the statutory 28 percent rate is applied to the platinum project, allowing deductions for economic depreciation of capital calculated using a declining balance of 40 percent.

Figure A43.Comparing Depreciation Methods

18. The recommended reform scenarios shift tax depreciation under the current regime back towards economic depreciation (Figure A43). The proposed treatment slows down the depreciation of assets as compared with the current regime, and while it disallows interest deductions, it compensates the investor with the deduction of an uplift on unredeemed capital designed to provide tax relief for both debt and equity financing. The reform scenario thus generates a CIT profile which is closer to that achieved under economic depreciation, while still maintaining relief to the investor for the risks involved in mineral extraction.

Impact of the Creditability of the Royalty

19. The creditability of the royalty against the cashflow surcharge provides some relief to the investor once the surcharge is triggered. However, this has the effect of decreasing government revenue (compared with Scenario 1(b)) at a time when the project has reached the specified threshold rate of return. The reduction in government revenue through the creditability of royalty liabilities is partially offset by lower surcharge deductions in the computation of corporate income tax.

Figure A44.Impact of Creditable Royalty

III. Economic Assessment of Petroleum Fiscal Regimes

Deepwater Offshore Oil

20. Economic modeling was undertaken on stylized deepwater offshore oil fields of 500 million and 1000 million barrels (MMBbl).Figure A46 presents the underlying project economics of the oil field examples used5. Since South African waters are a ‘frontier’ area in deepwater oil exploration, it is difficult to predict accurately the cost structures and project economics that are likely to materialize as exploration progresses. Many variables would be subject to change, and the analysis which follows considers a number of possible variations in price and cost which would alter the ultimate project economics6. Two field sizes were chosen to examine the economics of both a medium-sized and large discovery under the South African and alternative fiscal regimes. All simulations in this section are performed using FAD’s FARI modeling framework.

Figure A45.Oil Price Assumptions

21. A key variable underpinning the project economics is the oil price. As a base case assumption, the analysis assumes the oil price projections of the IMF World Economic Outlook (Figure A45) until 2020 beyond which the price projection is kept constant in real terms and inflated at a rate of 2 percent per annum. However, recognizing the unpredictable nature of oil price trends, the analysis which follows is undertaken on a range of prices, initially taking low and high case scenarios of $50 and $80/bbl in 2015 real terms, and inflated by 2 percent as shown in Figure A457.

Figure A46.Project Economics of Stylized Deepwater Offshore Oil Fields

22. The current regime was assessed under a number of simplifying assumptions. The key terms of the current regime are reflected in Table A24. The analysis assumes that 70 percent of development costs are financed by debt, at an interest rate of LIBOR +3.5 percent. For rehabilitation purposes, it is assumed that the joint venture makes tax-deductible contributions to a decommissioning fund once 50 percent of the projected reserves have been depleted. It is assumed in each case that the HDSA ownership requirements of the Mining Charter are fulfilled by the presence of a BEE entity as a partner in the collective joint venture. Exploration costs are not paid by the BEE entity, but after the exploration period, the entity contributes its share to development and subsequent expenditures as a normal working partner in the venture, as well as separately meeting income tax liabilities.

Table A24.South Africa’s Current Petroleum Fiscal Regime
Fiscal Provision
RoyaltiesCurrent regime
Variable Royalty0.5 + [earnings before interest and taxes/(gross sales in respect of refined mineral resources x 12.5)]. Max rate 5%.
Income Tax
Rate28%
Depreciation:
Investment Allowance/Accelerated Depreciation100% immediate expensing
Uplift on Exploration Costs100%
Uplift on Post-Exploration Costs50%
Loss Carry ForwardUnlimited
Withholding Taxes
Dividends0%
Interest0%
Participation Requirements
Local Participation10% HDSA Ownership

23. The current fiscal terms were evaluated for revenue generating capacity using the Average Effective Tax Rate (AETR) or “government take”.Tables A25 and A26 illustrate that the current regime generates an AETR of between 20 and 30 percent while Figures A47 and A48 show the profile of revenues relative to the pre-tax project cash flow over the project life. While the BEE entity is assumed not to form part of the government take, this requirement has an impact on the investor’s return, as illustrated in Tables A25 and A26. When reflected as a contribution to government take, the AETR increases to between 30 and 35 percent. International comparative analysis is presented later in this section; simulations previously undertaken by FAD suggest that in the petroleum sector governments retain government shares of between 65 and 85 percent.8

Figure A47.Evaluation of the Current Regime – 500MmBbl Field

Figure A48.Evaluation of the Current Regime – 1000MmBbl Field

24. The regime is tested under a range of cost and price assumptions. Under the base case 500MBbl field scenario using WEO prices, the project generates a post-tax rate of return of 12.7 percent in real terms, demonstrating the marginality of the project. Recognizing that these results are contingent on a number of price and cost assumptions, Figure A49 illustrates that even in low cost, high price scenarios the current regime is still only capable of generating government take figures in the 20 to 30 percent range. It also demonstrates the range of assumptions under which the investor generates a return beyond a hurdle rate, assumed here to be 12.5 percent. A return on a $60-70/bbl oil price and a unit cost of $35/bbl would leave the investor in a profitable position.

Table A25.Simulation Results - 500MmBbl Field
Oil Price Assumption
Project Fiscal Results (in US$ million real or %)$50/bbl (2015 Real Terms)WEO Price Projections$80/Bbl (2015 Real Terms)
Pre-tax project IRR19.7%26.4%31.0%
Post-tax IRR on total funds16.5%22.5%26.8%
Post-tax IRR on equity19.6%26.7%31.5%
IOC IRR19.2%26.2%30.9%
BEE Entity IRR23.7%32.7%39.5%
Pre-tax NCF undiscounted12,82420,72127,824
Post-tax investor NCF undiscounted8,59414,02918,911
o/w IOC7,63412,52616,921
o/w BEE Entity9601,5021,990
Government revenue undiscounted3,3485,8118,032
AETR undiscounted26.1%28.0%28.9%
AETR (including BEE)33.6%35.3%36.0%
Pre-tax NCF 10% discount2,3674,7076,811
Post-tax investor NCF 10% discount1,5663,2354,719
o/w IOC1,3722,8774,214
o/w BEE Entity194358504
Government revenue 10% discount8461,5162,136
AETR 10% discount35.7%32.2%31.4%
AETR 10% discount (including BEE)43.9%39.8%38.8%
Table A26.Simulation Results - 1000MmBbl Field
Oil Price Assumption
Project Fiscal Results (in US$ million real or %)$50/bbl (2015 Real Terms)WEO Price Projections$80/Bbl (2015 Real Terms)
Pre-tax project IRR26.0%33.6%38.9%
Post-tax IRR on total funds22.1%29.1%34.0%
Post-tax IRR on equity27.4%35.5%40.9%
IOC IRR27.3%35.3%40.6%
BEE Entity IRR28.2%37.9%45.3%
Pre-tax NCF undiscounted28,57344,36758,573
Post-tax investor NCF undiscounted19,24730,09239,842
o/w IOC17,19126,95335,728
o/w BEE Entity2,0563,1394,113
Government revenue undiscounted7,85412,80417,260
AETR undiscounted27.5%28.9%29.5%
AETR (including BEE)34.7%35.9%36.5%
Pre-tax NCF 10% discount6,32411,00315,211
Post-tax investor NCF 10% discount4,3697,67010,608
o/w IOC3,9136,8879,532
o/w BEE Entity4567831,075
Government revenue 10% discount2,0173,3954,666
AETR 10% discount31.9%30.9%30.7%
AETR 10% discount (including BEE)39.1%38.0%37.7%

Figure A49.Government Take and Investor IRR

25. The analysis suggests that the variable rate royalty is largely ineffective, with the royalty rate even in marginal scenarios quickly reaching the highest rate (Figure A50). A flat rate royalty would have largely the same effect in the majority of scenarios which investors would be likely to undertake in the South African environment.

Figure A50.Royalty Rate over Project Life-cycle

26. The analysis also incorporates exploration uncertainty to assess the investor’s perceived return on a risked, after tax basis. This is expressed as the expected NPV per dollar of expenditure or the expected monetary value (EMV) which equals the sum of the probability of unsuccessful exploration multiplied by expected after tax NPV loss from failed exploration costs, and the probability of each type of successful discovery multiplied by the expected after tax positive NPV from successful projects. Based on discussions with the authorities and with industry, the mission assumes a 12.5 percent chance of discovery. If a discovery is made, it is assumed that the probability of discovering a 500MmBbl field is 25 percent, while that of a 1000MmBbl field discovery is 75 percent.

27. At the current WEO forecast prices, the EMV of undertaking exploration is negative at a 5 and 10 percent discount rate. A positive EMV would necessitate higher price and/or lower cost outcomes. For example, raising the oil price assumption to $90/bbl yields a positive EMV. This suggests that while the current price environment has a clear negative impact on investor returns, those continuing with exploration activity are potentially anticipating higher price, lower cost assumptions, higher field size or a high chance of discovery, and consequentially a higher EMV than modeled here. In the analysis which follows, costs are maintained as established in Figure A46, but two oil price paths are modeled, WEO prices and constant real $90/bbl to demonstrate the impact of the fiscal regime under a higher profitability outcome.

Box A6.Expected Monetary Value Analysis

Figure A51.EMV

Table A27.EMV Results
Discount Rate
Price Assumption: WEO Forecast0.0%5.0%10.0%12.5%
NPV Exploration Costs−980−858−760−717
Probability of Discovery12.5%12.5%12.5%12.5%
Investor NPVProbability
500MMBbl9.38%14,0296,7503,2352,207
1000MMBbl3.13%30,09215,0207,6705,498
EMV1,398351−122−249
Price Assumption: $90/Bbl
NPV Exploration Costs−980−858−760−717
Probability of Discovery12.5%12.5%12.5%12.5%
Investor NPVProbability
500MMBbl9.38%22,34211,2185,7514,126
1000MMBbl3.13%46,70123,91912,6679,302
EMV2,6961,04827050
Cost Assumption: -30%
NPV Exploration Costs−686−601−532−502
Probability of Discovery12.5%12.5%12.5%12.5%
Investor NPVProbability
500MMBbl9.38%16,5988,3654,3143,107
1000MMBbl3.13%34,60717,7699,4426,949
EMV2,03781423469
Price Assumption: $80/Bbl, Higher Chance of Discovery
NPV Exploration Costs−980−858−760−717
Probability of Discovery15.0%15.0%15.0%15.0%
Investor NPVProbability
500MMBbl11.25%18,9119,3794,7193,340
1000MMBbl3.75%39,84220,24810,6087,735
EMV2,7891,08528356

28. Examples of each of the proposed reform alternatives to the current South African regime are evaluated.Table A28 presents the key terms of each of the scenarios. Scenarios 1 and 3 introduce a 5 percent flat rate royalty as well as reforms to the corporate income tax calculation involving a 10 percent allowance for corporate equity and 5 year depreciation using the straight line method reflecting the necessary reforms outlined in the main report. Scenario 1 (a) and (b) adds an additional cash flow surcharge at 20 and 30 percent respectively with a 10 percent uplift on capital expenditure in the year that it is incurred. Scenario 3 reflects a possible reform envisaged under the MPRDA Bill, introducing a 20 percent state participation, carried from development and repaid with interest. Under Scenario 2, a simple illustrative R-Factor production sharing scenario is introduced. The current regime and proposed alternatives are evaluated against the key fiscal objectives of revenue-raising capacity, neutrality and progressivity, and placed in international context of other petroleum-producing countries.

Table A28.Reform Scenarios
Fiscal provisionCurrent RegimeScenario 1 (a)Scenario 1 (b)Scenario 2Scenario 3
Royalty0.5 + [earnings before interest and taxes/(gross sales in respect of refined mineral resources x 12.5)] x 100. Max 5%5% Flat Rate5% Flat Rate5% Flat Rate
Income tax28%28%28%28%28%
DepreciationImmediate Expensing of all Capital ExpenditureStraight Line Depreciation over 5 years from Production Year 1Straight Line Depreciation over 5 years from Production Year 1Straight Line Depreciation over 5 years from Production Year 1Straight Line Depreciation over 5 years from Production Year 1
Uplift/Allowance for Corporate Capital100% uplift on exploration expenditure; 50% uplift on development expenditure10% uplift on balance of unredeemed capital10% uplift on balance of unredeemed capital10% uplift on balance of unredeemed capital10% uplift on balance of unredeemed capital
Loss carry-forwardUnlimitedUnlimitedUnlimitedUnlimitedUnlimited
Additional TaxCashflow Surcharge at 20% with uplift on capital expenditure at 10%Cashflow Surcharge at 30% with uplift on capital expenditure at 10%
Production Sharing70% Cost Recovery Limit
0<R<15%
1<R<220%
2<R25%
State Participation20% State Participation. Carry through to production with repayment of development costs from participation cashflows at interest rate of 7%
HDSA Requirements10% Local Ownership10% Local Ownership10% Local Ownership10% Local Ownership10% Local Ownership

29. Evaluating first the revenue raising potential, results illustrate that the range of reform scenarios allow for an AETR as high as 50 percent even under the WEO price assumptions (Table A29). The revenue pattern over the cycle of the projects mainly reflects the production profile of the project. The effect of the 5 year depreciation and allowance for corporate capital has the effect of altering the timing and size of corporate tax payments, while the cash flow surcharge and state participation have the effect of generating significant additional revenue when the project is generating sufficient positive cash flow. It should be noted that the 20 percent state participation and the 20 percent cash flow surcharge generate almost equivalent effects (Figures A52 and A53).

Figure A52.Total Government Revenue under Current and Reform Scenarios (WEO Prices)

Figure A53.Profile of Government Revenues – Reform Scenarios (500 MMBbl field, WEO Prices)

Table A29.Simulation Results
500MmBbl Field – WEO Prices
Project Fiscal Results (in US$ million real or %)South Africa Current RegimeScenario 1 (a): Cashflow Surcharge (20%)Scenario 1 (b): Cashflow Surcharge (30%)Scenario 2: Production SharingScenario 3: State Participation
Pre-tax project IRR26.4%26.4%26.4%26.4%26.4%
Post-tax IRR on total funds22.5%19.7%18.6%20.3%19.5%
Post-tax IRR on equity26.7%23.5%22.3%24.2%23.3%
IOC IRR26.2%23.1%21.9%23.4%22.5%
BEE Entity IRR32.7%28.9%27.5%33.2%31.6%
Pre-tax NCF undiscounted20,72120,72120,72120,72120,721
Post-tax investor NCF undiscounted14,02910,8119,53011,25510,602
o/w IOC12,5269,5998,4469,6699,134
o/w BEE Entity1,5021,2121,0841,5861,468
Government revenue undiscounted5,8119,02910,3108,5859,238
AETR undiscounted28.0%43.6%49.8%41.4%44.6%
AETR (including BEE)35.3%49.4%55.0%49.1%51.7%
Pre-tax NCF 10% discount4,7074,7074,7074,7074,707
Post-tax investor NCF 10% discount3,2352,3231,9862,4752,258
o/w IOC2,8772,0481,7442,0971,915
o/w BEE Entity358275241378343
Government revenue 10% discount1,5162,4282,7652,2762,493
AETR 10% discount32.2%51.6%58.7%48.4%53.0%
AETR 10% discount (including BEE)39.8%57.4%63.9%56.4%60.2%
500MmBbl Field – $80/bbl
Project Fiscal Results (in US$ million real or %)South Africa Current RegimeScenario 1 (a): Cashflow Surcharge (20%)Scenario 1 (b): Cashflow Surcharge (30%)Scenario 2: Production SharingScenario 3: State Participation
Pre-tax project IRR31.0%31.0%31.0%31.0%31.0%
Post-tax IRR on total funds26.8%23.6%22.3%24.1%23.4%
Post-tax IRR on equity31.5%28.0%26.6%28.5%27.8%
IOC IRR30.9%27.5%26.1%27.6%27.0%
BEE Entity IRR39.5%34.9%33.1%39.9%38.1%
Pre-tax NCF undiscounted27,82427,82427,82427,82427,824
Post-tax investor NCF undiscounted18,91114,70612,94115,05114,482
o/w IOC16,92113,10511,51712,95312,528
o/w BEE Entity1,9901,6011,4242,0981,954
Government revenue undiscounted8,03212,23714,00111,89212,460
AETR undiscounted28.9%44.0%50.3%42.7%44.8%
AETR (including BEE)36.0%49.7%55.4%50.3%51.8%
Pre-tax NCF 10% discount6,8116,8116,8116,8116,811
Post-tax investor NCF 10% discount4,7193,4953,0183,6273,426
o/w IOC4,2143,1032,6733,0962,939
o/w BEE Entity504392344530487
Government revenue 10% discount2,1363,3603,8373,2283,429
AETR 10% discount31.4%49.3%56.3%47.4%50.3%
AETR 10% discount (including BEE)38.8%55.1%61.4%55.2%57.5%
1000MmBbl Field – WEO Prices
Project Fiscal Results (in US$ million real or %)South Africa Current RegimeScenario 1 (a): Cashflow Surcharge (20%)Scenario 1 (b): Cashflow Surcharge (30%)Scenario 2: Production SharingScenario 3: State Participation
Pre-tax project IRR33.6%33.6%33.6%33.6%33.6%
Post-tax IRR on total funds29.1%25.4%24.1%26.1%25.3%
Post-tax IRR on equity35.5%31.5%30.0%32.3%31.4%
IOC IRR35.3%31.4%29.9%31.7%30.9%
BEE Entity IRR37.9%33.3%31.5%38.3%36.4%
Pre-tax NCF undiscounted44,36744,36744,36744,36744,367
Post-tax investor NCF undiscounted30,09223,34120,54924,05423,051
o/w IOC26,95320,82818,31620,74619,980
o/w BEE Entity3,1392,5132,2333,3083,071
Government revenue undiscounted12,80419,55522,34718,84219,845
AETR undiscounted28.9%44.1%50.4%42.5%44.7%
AETR (including BEE)35.9%49.7%55.4%49.9%51.7%
Pre-tax NCF 10% discount11,00311,00311,00311,00311,003
Post-tax investor NCF 10% discount7,6705,7024,9525,9665,617
o/w IOC6,8875,1014,4265,1454,866
o/w BEE Entity783601526822751
Government revenue 10% discount3,3955,3636,1135,0995,448
AETR 10% discount30.9%48.7%55.6%46.3%49.5%
AETR 10% discount (including BEE)38.0%54.2%60.3%53.8%56.3%
1000MmBbl Field - $80/bbl
Project Fiscal Results (in US$ million real or %)South Africa Current RegimeScenario 1 (a): Cashflow Surcharge (20%)Scenario 1 (b): Cashflow Surcharge (30%)Scenario 2: Production SharingScenario 3: State Participation
Pre-tax project IRR38.9%38.9%38.9%38.9%38.9%
Post-tax IRR on total funds34.0%30.0%28.4%30.6%29.8%
Post-tax IRR on equity40.9%36.6%34.9%37.4%36.5%
IOC IRR40.6%36.4%34.7%36.7%35.9%
BEE Entity IRR45.3%39.7%37.6%45.4%43.5%
Pre-tax NCF undiscounted58,57358,57358,57358,57358,573
Post-tax investor NCF undiscounted39,84231,12427,36331,86330,818
o/w IOC35,72827,83424,44827,53226,775
o/w BEE Entity4,1133,2912,9154,3314,043
Government revenue undiscounted17,26025,97729,73925,23826,284
AETR undiscounted29.5%44.4%50.8%43.1%44.9%
AETR (including BEE)36.5%50.0%55.7%50.5%51.8%
Pre-tax NCF 10% discount15,21115,21115,21115,21115,211
Post-tax investor NCF 10% discount10,6088,0296,9958,3197,940
o/w IOC9,5327,1966,2657,1946,900
o/w BEE Entity1,0758337301,1251,040
Government revenue 10% discount4,6667,2448,2786,9547,333
AETR 10% discount30.7%47.6%54.4%45.7%48.2%
AETR 10% discount (including BEE)37.7%53.1%59.2%53.1%55.0%

30. The proposed treatment of capital depreciation has the effect of altering the timing and size of corporate tax payments.Figure A54 analyses the impact of varying depreciation treatments under a hypothetical scenario where corporate income tax is the only charge on the 500MmBbl project. The current immediate expensing of expenditure with uplifts is compared with the proposed treatment as well as the profile of corporate income tax which would be seen if economic depreciation were approximated using a declining balance factor of 40 percent. The proposed treatment recognizes the potential need for accelerated depreciation in the petroleum sector on grounds of risk reduction, but generates a CIT profile which is closer to that achieved under economic depreciation compared with the generous immediate expensing allowance of the current regime.

Figure A54.Corporate Income Tax Profiles

31. The AETR, METR and breakeven prices for the current South African regime are low by international standards. The existing fiscal arrangements in South Africa and the alternative proposed reform scenarios were compared with fiscal regimes applicable in other petroleum producing countries from the region and elsewhere (Figure A55 and A56). 9 Some of the comparators included in the sample are regimes for other “frontier areas” (such as the Ghanaian regime before the 2008 Jubilee discovery); some are terms of established producers (Angola, Ghana post-Jubilee); and some have significant petroleum discoveries (Mozambique, Tanzania). The reform scenarios proposed place South Africa better in line with the sample of comparators. Under the field scenarios assumed, the Angola, Brazilian and Tanzanian regimes lead to marginal or unviable outcomes, placing high burdens on a marginal project relative to the rest of the comparators. Breakeven prices are significantly higher than the WEO forecast, suggesting that more favorable project economics have facilitated viable projects in these areas. While these comparators are useful for contextual purposes, the more appropriate comparators for South Africa would be those yielding average effective tax rates in the range of 60 to 80 percent. The fiscal terms of comparator countries are included in Table A39 of this supplement.

Figure A55.Average Effective Tax Rate

Figure A56.METR and Breakeven Oil Price

32. Recognizing the important impact of oil price volatility on investor perceptions of risk, particularly in a frontier exploration area, the mission undertook stochastic analysis to analyze the impact oil price uncertainty on government and investor outcomes. Monte Carlo simulations were used to account for uncertainty surrounding future oil prices by assuming that oil prices follow a stochastic stationary first-order autoregressive (AR(1)) process. The results were then used to measure the dispersion of possible outcomes, and infer the implied risk to the investor and the government under the current regime and reform scenarios. Details of the estimation of the parameters of this process are described in Box A7.

33. Investor perception of risk is evaluated by analyzing the mean expected post-tax IRR to the investor and the coefficient of variation (CV) of investor returns.Table A30 and Figure A57 shows the mean expected post-tax IRR and the CV of post-tax IRR for each regime tested for the 500MmBbl field. These results further demonstrate the generosity of the South African regime when compared internationally. Relative to the sample, the current and proposed regimes generate the highest mean post-tax IRRs, and do not appear to significantly increase the risk to the investor.

Box A7.Oil Price Simulation

This box explains the autoregressive model (i.e. the price today helps predict the price tomorrow) used to generate the stochastic oil price simulations used in this section.

Data used

The data used are the annual simple average of three oil spot prices: Dated Brent, West Texas Intermediate, and the Dubai Fateh published in the WEO between 1970 and 2014. These prices were adjusted annually for US inflation, using 2014 as the base year, and then normalized by taking natural logarithms.

Autoregressive (AR) model

It is assumed that real oil prices follow an autoregressive process given by:

where yt is the oil price in real terms defined above, α and β are parameters relating the current price to its past value, and et is a stochastic error term distributed normally with zero mean and variance σ2. Parameters of the model are estimated by OLS, yielding the following estimated equation:

Stochastic simulations

In stochastic simulations, future oil prices are generated recursively using this equation. A starting price of $80/barrel was used to reflect a realistic expected oil price for 2015, and with error terms randomly generated (using a normal distribution with parameters reported in (2)). Additionally, lower (US$20/bbl) and upper (US$200/bbl) bounds on oil prices are imposed to avoid extreme values. This exercise is repeated multiple times to construct a range of possible outcomes for future oil prices.

Source: Philip Daniel, Michael Keen, and Charles McPherson, 2010, The Taxation of Petroleum and Minerals: Principles, Problems and Practice, (Abingdon: Routledge).

34. Risk to government revenue can be considered through analysis of the coefficient of variation of the present value of government revenue. Under this analysis, the variance of government revenue is also at the lower end of the international sample under both the current regime and the reform scenarios.

Table A30.Stochastic Analysis Results: Investor and Government Risk
Offshore_South Africa_500MMMean Investor post tax IRRCoefficient of variation of IRRTax Induced Probability of below target return of 12.5%Mean Government NPVCoefficient of variation of Government Revenue
%%%$mm%
Project before tax33330n/a
After tax:
Angola: PSA Block 914433611,46371.4
Tanzania: 2013 MPSA Deep water12574611,38568.1
Brazil: Brazil Offshore > 400 Mts dept14534111,28864.5
Norway; SPT (offshore)243269,85864.4
Namibia: Model Contract 1998252439,44863.4
Argentina: Tax / Royalty2053259,27363.1
Ghana; Post Jubilee (2008)2439108,10561.8
Australia; PRRT253667,59661.2
Mozambique: Area 16&19 Offshore293447,23661.1
Ghana; Pre Jubilee (2004)263887,05460.7
South Africa : Flat Rate Royalty + 30% Cashflow Surcharge (Scenario 1 (b))283586,45560.1
South Africa : Flat Rate Royalty + 20% State Participation (Scenario 3)303575,73659.7
South Africa : Flat Rate Royalty + 20% Cashflow Surcharge (Scenario 1 (a))303565,65859.2
South Africa : Production Sharing (Scenario 2)313465,41358.9
South Africa : South Africa Current Regime343343,61552.9

Figure A57.Mean Investor IRR and Risk

35. The progressivity of the current and proposed fiscal regimes was evaluated by estimating the government share of total benefits10over a range of project results.Figures A58 shows how the government take varies over a range of project net present value. The variation in project NPV (reflective of project profitability) was generated by adjusting oil prices in constant real terms. At low profitability levels, all the scenarios place a lower burden on projects with lower pre-tax profitability. With the additional progressive fiscal elements, Scenarios 2 to 4 clearly yield a higher share of total benefits for the government as the profitability of the project increases.

Figure A58.Progressivity of Reform Scenarios

Onshore Shale Gas

36. Analysis was also applied to a stylized 1.9 Tcf onshore shale gas project. The stylized scenario is purely hypothetical, constructed based on economic literature on shale gas extraction, industry knowledge of the South African context and comparable data from other countries. The example assumes that 742 wells are drilled over a 43 year project period with an expected ultimate recovery (EUR) of 2.7Bcf per well. Key project parameters are outlined in Figure A59, along with the production profile of each well and the project as a whole.

37. The current petroleum fiscal regime and proposed reform alternatives were applied to the shale gas project. The analysis was constructed to generate a gas price which would allow such a project to generate a hurdle rate of return of 12.5 percent post-tax real IRR to the investor. Figure A60 shows the gas price that would be warranted in each scenario, as well as the burden of the fiscal regime on the project at these price levels, as indicated by the METR. The underlying project economics assumed require significantly higher than current market gas prices for a viable project. However, it is clear from Figure A60 that the effects of the reform scenarios have the same relative impacts as in the deepwater offshore oil scenarios.

Figure A59.Shale Gas Project Parameters

Figure A60.Breakeven Gas Price

Figure A61.Profile of Government Revenues – Current Regime and Reform Scenarios (Breakeven Prices)

Figure A62.Profile of Government Revenues – Current Regime and Reform Scenarios (Breakeven Prices)

38. The mission undertook sensitivity analysis to assess the impact of varying project parameters on the breakeven gas price as well as the progressivity of proposed reforms.Figure A64 shows that variations in well productivity and project costs have a significant impact on the minimum required gas price, and given an indication of the variation in project parameters which might be necessary to yield a breakeven price closer to current domestic gas price levels11. Figure A63 shows that as the profitability of the project increases (generated by varying the gas price), the regimes display the expected progressivity trends. Regimes containing additional progressive fiscal elements, yield a higher share of total benefits for the government as the profitability of the project increases.

Figure A63.Progressivity of Reform Scenarios

Figure A64.Sensitivity Analysis – Shale Gas

IV. Potential Revenue from the South African Mining Sector

39. The mission constructed an approximation of the revenue potential of the South African mining sector. The approximation is a medium term forecast for the key minerals in the sector: iron ore, coal, PGMs, gold, diamonds, and copper. These minerals have historically made up 80-85 percent of total mineral sales and exports (Figure A9). Smaller mineral groups are not modeled, and industrial minerals, aggregate and sand are excluded from the analysis. Further work could be done to add estimates for other significant minerals in the sector which may grow in relevance, for example, chrome. The analysis is also focused on forecasting two key revenue streams in the mining sector –the mineral and petroleum resource royalty (MPRR) and corporate income tax (CIT).

40. The analysis was undertaken in two stages, combining project level forecasting for eight major South African mines with an aggregated approximation for the rest of the sector. The project-level analysis uses FAD methodology to model and approximate revenue potential from eight mines for which sufficient data was available. The sector-wide approximation uses available data on historical production, tax collection levels and costs to make a range of possible revenue projections.

A. Project Level Analysis

Methodology and Challenges

41. Data provided to the mission by the authorities showed that a large portion of tax revenue received from the mining sector has historically been paid by a small number of entities. The data provided showed that 20 legal entities contributed 60-80 percent of royalty revenue and 40 to 70 percent of CIT revenue, varying by year over the period 2009-2014 (Table A31). The mission’s research suggests that these entities each in turn operate over 100 mines across a range of mineral groups, most notably iron ore, coal, diamonds, gold and copper.

42. The FAD mine-level modeling methodology uses a discounted cash flow model to simulate future tax revenue from 8 large mines. For each project modeled, historical figures of mineral production, sales, capital and operating costs are first used to compute tax liabilities, which are in turn verified against historical tax payment data. Projections of production, price and cost variables are then made for each mine in order to generate a forecast of future tax collections.

Table A31.Taxpayer Contributions in the Mining Sector 12
Fiscal Year2009/102010/112011/122012/132013/14
Amounts in Rand (million)
Total Contributions
MPRRn.a.3,5555,6125,0156,420
MPRR % of government revenuen.a.0.46%0.66%0.55%0.63%
MPRR % of GDPn.a.0.13%0.19%0.16%0.19%
CIT14,16717,39018,320n.an.a.
CIT % of government revenue2.45%2.27%2.17%n.an.a.
CIT % of GDP0.58%0.63%0.61%n.an.a.
MPRR
Top 20 taxpaying entitiesn.a.2,7244,0263,3314,800
% of all MPRRn.a.77%72%66%75%
% of government revenuen.a.0.36%0.48%0.37%0.47%
% of GDPn.a.0.10%0.14%0.10%0.14%
Top 10 taxpaying entitiesn.a.2,5743,8022,9414,431
% of all MPRRn.a.72%68%59%69%
% of government revenuen.a.0.34%0.45%0.32%0.44%
% of GDPn.a.0.09%0.13%0.09%0.13%
Top 4 entitiesn.a.1,9602,6522,4643,777
% of all MPRRn.a.55%47%49%59%
% of government revenuen.a.0.26%0.31%0.27%0.37%
% of GDPn.a.0.07%0.09%0.08%0.11%
CIT
Top 20 taxpaying entities9,99814,1228,388n.an.a.
% of all mining sector CIT71%81%46%n.an.a.
% of government revenue1.73%1.85%0.99%n.an.a.
% of GDP0.41%0.51%0.28%n.an.a.
Top 10 taxpaying entities9,28613,4437,486n.an.a.
% of all mining sector CIT66%77%41%n.an.a.
% of government revenue0.38%0.49%0.25%n.an.a.
% of GDP0.38%0.49%0.25%n.an.a.
Top 4 entities5,7127,3888,119n.an.a.
% of all mining sector CIT40%42%44%n.an.a.
% of government revenue0.23%0.27%0.27%n.an.a.
% of GDP0.23%0.27%0.27%n.an.a.
MPRR = Mineral and Petroleum Resource RoyaltyCIT = Corporate Income TaxSource: Mining sector tax data provided by National Treasury and SARS. Total Government Revenue and GDP figures are from the World Economic Outlook database.
MPRR = Mineral and Petroleum Resource RoyaltyCIT = Corporate Income TaxSource: Mining sector tax data provided by National Treasury and SARS. Total Government Revenue and GDP figures are from the World Economic Outlook database.

43. In the case of South Africa, a number of challenges limited the use of this project-level methodology. These challenges included: (1) Lack of available historical production, cost and price data at the mine level, (2) Limited data provided on historical tax collections at a mine level in order to verify the methodology; (3) Complex and varied ring-fencing treatments.

44. The majority of entities operated a large number of mines, and lack of data at the mine level was a significant challenge to the mine-level forecasting exercise. Data challenges were the most significant in the coal, platinum and diamond sectors, where in many case taxpaying entities each operated over 10 mines. Without production and cost data for individual mines, these sectors could only be approximated using a more aggregate methodology (Section B).

45. The complex ring fencing treatment in South Africa posed significant challenges to this methodology. Some limited data was provided to the mission detailing the computation of taxable income for each entity. Some entities were subject to mine-level ring-fencing, while others appeared to be taxed on a consolidated basis, and some even included non-mining income in the tax computations. Limited historical data on tax payments in previous years posed a challenge in understanding the exact ring fencing arrangements of each entity, as well as in verifying the modeling methodology through comparison of model output with taxpayer records.

46. The challenges of the South African context led to the narrowed focus of the analysis to 8 mines operated by 4 significant taxpaying entities for which sufficient data were available. Three gold mines were modeled, along with a copper mine and two iron ore mining entities. The first of these iron ore mining entities operates three mines but is understood to be a ring fenced as a single entity for tax purposes and therefore was modeled as such. The second entity operates a number of mines, but only the largest of its operations (an iron ore mine) was modeled. These four entities contributed on average 50 percent of royalty revenue and 40 percent of CIT revenue, varying by year over the period 2009-2014 (Table A31).

47. Projections of production, price and cost data were made in order to generate a forecast. This again proved to be a challenge, as companies often had not published mine-level production and cost projections. Where unavailable, an attempt was made to discern a forecast based on future plans described in investor presentations for the mine under analysis. If unavailable, historical trends as well as information on market outlooks were used to generate forecasting assumptions. The base case assumes that prices stay constant in real terms at the average 2015 price as of March 2015, as reported by IMF WEO.

48. For each of the production, cost and price variables, ‘high case’, ‘base case’ and ‘low case’ assumptions were made to provide a reasonable range for the forecast. Price forecasts took into account the industry outlook for each sector with a more modest 2 percent deviation around the base case in the gold sector as compared with the iron ore and copper sector, where there appears to be a wider range of expected prices. Capital expenditure is assumed constant for all three cases, while an assumption is made about the growth rate of unit operating costs in the sector. The low case sees growth in the real value of unit costs, while the high case sees the alleviation of constraints such as infrastructure, power, water and labor costs reflected in a decline in real unit operating costs. The scope for such a reduction in unit operating costs is assumed to be bigger in the bulk commodity sectors than for gold. Low and high case production scenarios simply assume a deviation of 5 percentage points from the base case, with the exception of the copper mine which is understood to be considering ceasing production in 2015. This outcome is reflected in the low case, while in the base and high case it assumed that the mine undertakes capital expansion to extend the life of the mine. These assumptions are detailed in Table A32.

Table A32.Project Level Assumptions
Low CaseBase CaseHigh Case
Production (% deviation from base case)
Gold−5.0%0.0%5.0%
Iron Ore−5.0%0.0%5.0%
Copper−5.0%0.0%5.0%
Unit Costs (growth rate p.a.)
Gold1.50%0.75%0.00%
Iron Ore2.0%0.0%−2.0%
Copper2.0%0.0%−2.0%
Unit Price (% deviation from 2015 price)*
Gold−2.0%0.0%2.0%
Iron Ore−20.0%0.0%20.0%
Copper−5.0%0.0%5.0%

assumed constant in real terms from 2015 onwards.

assumed constant in real terms from 2015 onwards.

Figure A65.Project-Level Forecast: Total Mining Revenue

Figure A66.Project-Level Forecast: Mining Revenue by Revenue Stream (Base Case)

Table A33.Total Royalty and CIT by Scenario13
A=Actual; E=Estimate
Rand millions 2014 Real Terms
Low case
Royalty2011A2012A2013A2014E2015E2016E2017E2018E2019E
Gold398.6398.6370.8333.8300.7
Iron Ore431.1443.1436.5402.9368.6
Copper
CIT
Gold762.6762.6709.2631.1561.7
Iron Ore597.0584.6563.4488.1411.3
Copper
Base case
Royalty2011A2012A2013A2014E2015E2016E2017E2018E2019E
Gold290.0282.0414.0382.2475.0484.3459.4422.3388.4
Iron Ore1,900.91,757.53,708.71,932.71,370.21,559.41,603.51,603.51,603.5
Copper79.048.036.027.926.552.861.269.5171.3
CIT
Gold766.0428.0770.0750.4999.21,035.2996.7922.9855.0
Iron Ore6,642.15,557.07,696.73,696.72,571.52,943.83,034.23,034.23,034.2
Copper638.050.0434.041.7300.3
High case
Royalty2011A2012A2013A2014E2015E2016E2017E2018E2019E
Gold556.1575.6553.7516.3481.4
Iron Ore2,484.62,888.32,999.33,044.73,089.1
Copper69.2112.1129.2145.5275.8
CIT
Gold1,252.11,327.21,304.71,235.01,167.7
Iron Ore4,940.65,774.16,012.26,113.86,213.4
Copper110.6215.8252.4525.9
Total revenue2011A2012A2013A2014E2015E2016E2017E2018E2019E
Actual
Low case2189.32188.92079.91856.01642.5
Base case10315.98122.513059.46789.95442.36075.56155.16094.26352.8
High case9302.510787.911214.811307.711753.3
Total forecasted revenue as a share of GDP2011A2012A2013A2014E2015E2016E2017E2018E2019E
Low case0.06%0.05%0.04%0.04%0.03%
Base case0.35%0.26%0.39%0.19%0.14%0.14%0.13%0.12%0.12%
High case0.24%0.25%0.24%0.23%0.22%
Total forecasted revenue as
a share of total government2011A2012A2013A2014E2015E2016E2017E2018E2019E
revenue
Low case0.19%0.18%0.16%0.13%0.10%
Base case1.26%0.91%1.34%0.65%0.48%0.49%0.46%0.42%0.41%
High case0.82%0.87%0.84%0.78%0.75%

B. Sector-wide Forecast

49. To approximate the tax contribution and revenue raising potential of the rest of the sector, the mission undertook a simple calculation for the major mineral groups, using publicly available data. It should be noted that this is a high-level approximation of tax revenue contributions from the sector, and it is not intended as an accurate forecasting instrument. Further refinements could be made to the methodology to include new mineral types or to add further detail to revenue and cost elements of the calculation.

50. Data published by the Department of Mineral Resources14on historical production volumes and value by mineral group provided the most comprehensive available database. Since the dataset was only available until 2012, indications of recent trends for production and value in the mining sector were used on a conservative basis to approximate figures up to 2014. The portion of the sector which is modeled on a mine-level as described in Section A was then ‘netted out’ of the sectoral calculation. Since the mine-level calculations undertaken for large iron ore and copper mines in Section A constituted the majority if not all of the mineral production for that group, these were not approximated again.

51. Historical tax data were used to discern the likely reported costs for the sector. This included MPRR collections as published in the Treasury15, and estimates of historical CIT data provided to the mission by the authorities disaggregated by mineral group. Some discrepancies emerged which necessitated adjustments for the forecast. For example, in the coal sector, data suggest that the effective royalty rate since the inception of the MPRR has been approximately 0.3 percent, which is below the minimum rate and below the rate which would be inferred from the profitability levels suggested by CIT collections during the same period. Similarly for platinum, data suggest an effective royalty rate of 0.8 percent, lower than would be expected from CIT data. In these cases, to allow for a more realistic forecast, projections were made on the likely effective royalty rate over the medium term.

52. Assumptions were then made in order to generate revenue projections. Once again for each of the production, cost and price variables a range of ‘high case’, ‘base case’ and ‘low case’ assumptions were made to provide a reasonable range for the forecast (Table A34). As with the price and cost assumptions under the project-level analysis, these projections were based on an assessment of the key risks and upside potentials facing each mineral group. For example, in the gold sector, it is evident that production from South African mines is on a downward trend and therefore scenarios consider a varying rate of decline of overall gold production. For the remaining mineral groups, discussions with both industry groups and the authorities suggested that the risks to production and costs could be categorized into three main areas: rising input costs (labor, power and water), regulatory the mineral type, a combination of production and cost growth factors were used to generate the forecast.

53. Price forecasts took into account the industry outlook for each sector. For example, in the platinum sector, the mission learned from discussions with industry that the expected price trends were significantly higher over the medium term, and therefore the range of price projections used were varying degrees of price increases from the estimated 2014 unit mineral values. Coal projections used more conservative price decline scenario for the low case scenario.

Table A34.Sector-level Forecast Assumption
Low CaseBase CaseHigh Case
Production (growth rate p.a.)
PGMs2%4%6%
Gold−6%−4%−2%
Coal1%3%6%
Diamonds1%0%−1%
Unit Costs (growth rate p.a.)
PGMs1%0%−2%
Gold1.50%0.75%0%
Coal2%0%−2%
Diamonds1%0%−1%
Unit Price (% deviation from 2014 price)*
PGMs1%3%5%
Gold−2%0%2%
Coal−5%0%5%
Diamonds0%1%4%
Effective Royalty Rate
PGMs0.8%0.8-1%0.8-1.2%
Coal0.4%0.4-0.7%0.4-1%

assumed constant in real terms from 2015 onwards

assumed constant in real terms from 2015 onwards

Figure A67.Sector-level Forecast Results: Government Revenue

54. Projections can be put into the context of the proposed recommendations. To provide an example, one can first assume that the growth in production projected under the base case for the platinum sector between 2015 and 2019 is entirely attributable to new greenfield mines similar to those modeled in the Analysis Supplement. Such an increase in production this would amount to approximately 4 of the projects seen in Box A2 in the initial years of the project life as production ramps up to peak levels. Applying the proposed reform scenario 1(b) to the stylized platinum project resulted in an increase approximately R1, 605 m (2015 real terms) over the 19 year project production period16. Under the assumption that all production growth results from greenfield projects, a switch to the proposed reform scenario for such projects would result in an increase of R6.4bn over 19 years, or approximately R340 m per year. A similar exercise attributing the base case growth in coal production to new mines would amount to between 4 and 5 new coal mines akin to the project in Box A3, each ramping up production between 2015 and 2019. A switch to reform scenario 1(b) would imply an increase in revenue of approximately R4.5bn over the 21 year production period, or R220m per year.

Table A35.Sector-level Forecast Results
2014 real terms (Rand mm)
Low Case
Royalty2015E2016E2017E2018E2019E
Gold810.7736.9642.0544.1479.5
Iron Ore431.1443.1436.5402.9368.6
Coal401.2405.2409.2413.3417.5
PGM512.3522.6533.0543.7554.6
Diamonds224.3216.1208.0200.0192.1
Copper
CIT2015E2016E2017E2018E2019E
Gold762.6762.6709.2631.1561.7
Iron Ore597.0584.6563.4488.1411.3
Coal2,296.01,799.11,281.5742.5181.4
PGM2,228.32,113.41,991.41,861.91,724.8
Diamonds552.5527.9503.5479.3455.4
Copper
Base Case
Royalty2011A2012A2013A2014*2015E2016E2017E2018E2019E
Gold741.61,050.8910.3959.81,003.2966.0897.3818.9746.2
Iron Ore1,900.91,757.53,708.71,932.71,370.21,559.41,603.51,603.51,603.5
Coal287.4401.1401.5397.2511.4526.7651.1670.6805.8
PGM759.6558.6540.6497.3599.3692.5720.3749.1779.0
Diamonds245.0203.5124.1232.6234.9237.2239.6242.0244.4
Copper79.048.036.027.926.552.861.269.5171.3
CIT2011A2012*2013*2014*2015E2016E2017E2018E2019E
Gold709.3694.41,708.31,107.91,239.71,166.71,027.0922.9855.0
Iron Ore6,642.15,557.07,696.73,696.72,571.52,943.83,034.23,034.23,034.2
Coal2,767.82,740.82,778.82,772.92,827.52,912.32,969.33,058.43,117.9
PGM2,571.42,422.22,477.62,163.82,770.42,861.82,976.33,095.33,219.2
Diamonds718.7624.6568.7577.4583.2589.0594.9600.9606.9
Copper638.050.0434.041.7300.3
High Case
Royalty2015E2016E2017E2018E2019E
Gold1,204.91,211.51,176.91,127.01,079.9
Iron Ore2,484.62,888.32,999.33,044.73,089.1
Coal526.3669.4827.91,002.91,196.0
PGM622.7733.4855.2988.91,048.2
Diamonds245.7259.4273.6288.4303.7
Copper69.2112.1129.2145.5275.8
CIT2015E2016E2017E2018E2019E
Gold1,888.91,951.21,916.21,834.31,755.1
Iron Ore4,940.65,774.16,012.26,113.86,213.4
Coal3,438.24,162.04,948.75,802.76,728.9
PGM3,509.54,032.24,597.95,209.65,895.0
Diamonds614.6653.4693.7735.6779.2
Copper110.6215.8252.4525.9
2011A2012*2013*2014*2015E2016E2017E2018E2019E
Low Case8,8168,1117,2786,3075,347
Base case18,06116,10921,38514,36613,73814,50914,77514,90715,484
High Case19,54522,55824,64626,54628,890
% of GDP2011A2012*2013*2014*2015E2016E2017E2018E2019E
Low Case0.22%0.19%0.16%0.13%0.10%
Base case2.21%0.51%0.63%0.39%0.35%0.34%0.32%0.30%0.28%
High Case0.49%0.53%0.53%0.53%0.53%
% of government revenue2011A2012*2013*2014*2015E2016E2017E2018E2019E
Low Case0.78%0.66%0.54%0.44%0.34%
Base case0.62%1.81%2.20%1.37%1.21%1.17%1.10%1.03%0.99%
High Case1.72%1.83%1.84%1.83%1.84%
A=Actual; *=Model output, actual figures not available.Actual royalty figures from 2014 Treasury Tax Statistics, CIT figures from Treasury data, with calendar year adjustment
A=Actual; *=Model output, actual figures not available.Actual royalty figures from 2014 Treasury Tax Statistics, CIT figures from Treasury data, with calendar year adjustment

Figure A68.Sector-Level Forecast Results

Table A36.International Comparators – Platinum Fiscal Regimes
CountryRoyalty rateRoyalty baseCorporate Income TaxLoss carry forwardDepreciation ruleExport TaxAdditional Profit TaxDividend Withholding TaxInterest Withholding Tax
Canada - Ontario5-10% mining tax based on locationNet profits15% federal + 10% provincial; 5% provincial tax creditIndefinite for capital loss or 20 years for noncapital losses100% exploration cost (will be fully treated like development by 2018); 30% DB development cost [federal]NoneNone25%; 0% for resident companies25%; 0% for resident companies
Russia6% [gold] 6.5% [platinum, copper] 8% [nickel]Volume x sales price less freight and refining cost20%; reduction possible10 yearsTen groups of assets with different depreciation rates; SL or DB; 1-2 years for extraction equipment6.5% [diamonds] 6.5% [coke/semi-coke from coal, lignite or peat]None15%; reduced to 10% in treaties20%; reduced to 5-10% in treaties
United States -Montana1.81% [gold, nickel, copper and platinum]Market value less transportation and refining costs15%-35% [federal]20 years70% in first year on exploration and development cost, balance on SL over 5 years; other methods possibleNone0%-30%; reduced to 10% in treaties0%-30%; reduced to 15% in treaties
Zimbabwe7% [gold] 10% [platinum] 2% [nickel, copper]Gross Value25% 15% for Special Mining LicenseIndefinite100% on all capital expenditure20% on export value of unprocessed chrome27-31% based on real IRR15%0%
Table A37.International Comparators – Coal Fiscal Regimes
CountryRoyalty rateRoyalty baseCorporate Income TaxLoss carry forwardDepreciation ruleExport TaxAdditional Profit TaxDividend Withholding TaxInterest Withholding Tax
Australia - New South Wales6.2%-8.2% [coal]Ex-mine30%Indefinite100% exploration; 15 and 10 years prime cost method for capex and replacement (effective lives determined by govt)None [assumed]None30% [unfranked dividends]; 0% [assuming all franked credits are used]10%
Australia - Queensland7%-15% [coal]Gross value less marine cost, transportation costs are deducted for coal30%Indefinite100% exploration; 15 and 10 years prime cost method for capex and replacement (effective lives determined by govt)None [assumed]None30% [unfranked dividends]; 0% [assuming all franked credits are used]10%
Australia - VictoriaAUS$0.0588/GJ [brown coal]Energy contant for coal, gross value for ad valorem30%Indefinite100% exploration; 15 and 10 years prime cost method for capex and replacement (effective lives determined by govt)None [assumed]None30% [unfranked dividends]; 0% [assuming all franked credits are used]10%
ChinaCNY 0.3-20/ton [coal]Volume25.0%5 years100% on exploration; 10% SL on development; 25% SL on replacement [assumed]None [assumed]None10%10%; reduced to 5% in treaties
Colombia5% [coal when production <3 mil tons/year] 10% [coal when production >3 mil tons/year]Gross values of production25%Indefinite20% exploration cost; 20% machinery, equipment and other fixed assetsNone [assumed]9% additional tax on equity; 8% from 201633% [non-residents]; reduced to 15% in treaties14%-33% depending on nature and terms of loan; reduced to 7-15% in treaties
India14% [coal]LME/sale prices * volume30%+ 3%-13% surcharge if above thresholds8 years20% for other capex; 15% DB for plant and machinery10% [iron and chromium ores and concentrates, coal]None16.22%; reduced to 10% in treaties21.01%; reduced to 5% in treaties
Indonesia10%-13% [coal]Net sales25%5 years100% exploration; 20% intangibles; 6.25% tangibles; 25% [assumed] replacementExemptNone20% [non-residents]; reduced to 10% in treaties20% [non-residents]; reduced to 10% in treaties
Kazakhstan0% [coal]Gross revenues20.0%10 yearsRates chosen by companies with max. of 25% per yearNone in general; 2.1% for coal0%-60% excess profit tax, based on ratio of income to deductions15%; reduced to 10% in treaties15%; reduced to 10% in treaties
RussiaRUB 57/ton [coke] 4% [peat, lignite, anthracite and shale oil; apatite-nipheline, apatite ores]Volume x sales price oil, less freight and refining cost20%; reduction possible10 yearsTen groups of assets with different depreciation rates; SL or DB; 1-2 years for extraction equipment6.5% [diamonds] 6.5% [coke/semi-coke from coal, lignite or peat]None15%; reduced to 10% in treaties15%; reduced to 5-10% in treaties
United States - Wyoming7% [Surface Coal] 3.75% [Underground Coal]Value at the minegate15%-35% [federal]20 years70% in first year on exploration and development cost, balance on SL over 5 years; other methods possibleNone0%-30%; reduced to 10% in treaties0%-30%; reduced to 15% in treaties
Table A38.International Comparators – Base Metals Fiscal Regimes
CountryRoyalty rateRoyalty baseCorporate Income TaxLoss carry forwardDepreciation ruleExport TaxAdditional Profit TaxDividend Withholding TaxInterest Withholding TaxEquity
Australia - Western Australia5-7.5% [iron ore]

5% [cobalt concentrate]; 2.5% [cobalt in metallic form and nickel byproduct] 5% [copper concentrate]; 2.5% [copper in metallic form]
Gross invoice value of the mineral less any allowable deductions for the mineral such as transport and packaging30%Indefinite100% exploration; 15 and 10 years prime cost method for capex and replacement (effective lives determined by govt)None [assumed]None30% [unfranked dividends]; 0% [assuming all franked credits are used]10%
Australia - South Australia3.5% [refined mineral products and industrial minerals] All reduced to 2% for first 5 years of productionMarket value less transportation, insurance, packaging, storage.30%Indefinite100% exploration; 15 and 10 years prime cost method for capex and replacement (effective lives determined by govt)None [assumed]None30% [unfranked dividends]; 0% [assuming all franked credits are used]10%
Brazil2% [iron ore, copper, other mineral substances]Net revenue, i.e., the mineral sales revenue less taxes levied on revenue, insurance and freight costs.34%Indefinite w/30% limit on taxable income to offset loss carried forward100% for exploration and development costs; SL 10 years for equipment and machinery and buildingsExempt3.65% social contribution (cumulative regime)0%15%; reduced to 10% in treaties
Canada - Ontario5-10% mining tax based on locationNet profits15% federal + 10% provincial; 5% provincial tax creditIndefinite for capital loss or 20 years for noncapital losses100% exploration cost (will be fully treated like development by 2018); 30% DB development cost [federal]NoneNone25%; 0% for resident companies25%; 0% for resident companies
Canada - Quebec1%-4% min mining tax + 16%-28% profit-based mining taxGross value; net profits15% federal + 11.9% provincial; 25% exploration cost tax creditIndefinite for capital loss or 20 years for noncapital losses100% exploration cost (will be fully treated like development by 2018); 30% DB development cost [federal]NoneNone25%; 0% for resident companies25%; 0% for resident companies
Canada - Manitoba10-17% based on profitNet profits15% federal + 12% provincialIndefinite for capital loss or 20 years for noncapital losses100% exploration cost (will be fully treated like development by 2018); 30% DB development cost [federal]NoneNone25%; 0% for resident companies25%; 0% for resident companies
Canada - Newfoundland20%Net profit15% federal + 14% provincialIndefinite for capital loss or 20 years for noncapital losses100% exploration cost (will be fully treated like development by 2018); 30% DB development cost [federal]NoneNone25%; 0% for resident companies25%; 0% for resident companies
Chile0%-14% based on production level and operating marginCIT base with some adjustments23%; 42% if the company opted for the tax invariability regimeIndefinite100% exploration; 100% intagible development; 11.11% tangible development and replacementNoneNone35%; reduced to 7% in treaties; CIT is creditable depending on the regime4%
ChinaCNY 0.4-30/ton [non-ferrous metal ores] CNY 2-30/ton [ferrous metal ores]Volume25.0%5 years100% on exploration; 10% SL on development; 25% SL on replacement [assumed]None [assumed]None10%10%; reduced to 7% in treaties
Guinea3% [iron ore] 3% [copper, tin, nickel, zinc] Note: export taxes applicableVary by types30%3 years33.3% on startup cost; 20% on machiery and equipment; DB available 2%2%None10%10%Max. 15% initial free equity; supplemental equity of up to 35%
Kazakhstan5.7% [copper] 8% [lead] 7% [zinc] 2.8% [iron ore]Gross revenues20.0%10 yearsRates chosen by companies with max. of 25% per yearNone in general; 2.1% for coal0%-60% excess profit tax, based on ratio of income to deductions15%; reduced to 10% in treaties15%; reduced to 10% in treaties
Russia8% [conditioned non-ferrous metal ores]Volume x sales price oil, less freight and refining cost20%; reduction possible10 yearsTen groups of assets with different depreciation rates; SL or DB; 1-2 years for extraction equipment6.5% [diamonds] 6.5% [coke/semi-coke from coal, lignite or peat]None15%; reduced to 10% in treaties20%; reduced to 5-10% in treaties
United States - Arizona2.50%50% of the difference between the gross value of production and the production costs15%-35% [federal]; 6.468% in 2014 to be reduced by 0.5 percentage points a year until 2017[Arizona]20 years70% in first year on exploration and development cost, balance on SL over 5 years; other methods possibleNoneNone0%-30%; reduced to 10% in treaties0%-30%; reduced to 15% in treaties
United States - NevadaSliding scale based on profitability (ratio of net proceeds to gross yield); max 5%Net Proceeds15%-35% [federal]; 0% [Nevada]20 years70% in first year on exploration and development cost, balance on SL over 5 years; other methods possibleNoneNone0%-30%; reduced to 10% in treaties0%-30%; reduced to 15% in treaties
Table A39.International Comparators – Petroleum Fiscal Regimes
CountryRegimeRoyalty rateCost recovery limitState shareCorporate income taxDepreciation ruleLoss carry forwardSupplementary profit taxDividend withholding taxInterest withholding taxState participation
AngolaPSC0% for PSC, 10% for marginal/hard to acess fields, 20% for service contracts & partnerships50%30%-90%; IRR (offshore), Cumulative production (onshore)50% for PSA, 65.75% for service contracts & partnerships25% development, 16.6% for all othersIndefiniteNA10% (2007 bid round); Oil and gas companies currently exempt10% (2007 Bid Round)15%-65% carried to discovery
ArgentinaTax / Royalty12%; may be reduced for marginal fieldsNANA35%Wells, machinery, equipment, productive assets & intangible assets are basesd on units of production; Others are based on straight-line5 years10%15%; reduced to 10% in treatiesVaries
AustraliaPRRTNANANA30%100% exploration, 11 years development at SL or DB, 5 years replacement capital [government determines the effective life of assets]Indefinite40% PRRT after uplift of LTBR + 15% for exploration and LTBR + 5% for general expenditure0% (franked dividends); 30%;30% (nonresidents only)NA
BrazilPSC/Concession Contract10% for CC (may be reduced for marginal fields); negotiable for PSC34%10% machinery and equipment; 20%vehicles; SLIndefinite10%-40% special participation fee based volume and/or profitability0%15%; reduced to 10% with treatiesMax 30% for concession and min 30% for PSC 2.5% from
Ghana (pre-Jubilee)Tax/RoyaltyOil: 5% Gas: 5%NANA35%20%Indefinite7.5%-25% Additional Oil Entitlement8%10%2.5% from development + 10% at production
Ghana (post-Jubilee 2008)Tax/RoyaltyOil: 10% Gas: 5%NANA35%20%Indefinite12%-28% Additional Oil Entitlement0%10%10% from development + 10% at production
MozambiquePSCOil: 3%-10% Gas: 2%-6%65%-85% depending on depth5%-50%; R-Factor32%100% exploration cost; 25% other capital cost5 yearsNA10%0%10% carried to discovery
NamibiaTax/Royalty5%NANA35%100% exploration; 3 years development; SLIndefiniteIRR-based Additional Petroleum Tax(APT); 0% if IRR<15%, 25% if IRR at 15%, 35% if IRR at 20%, 50% if IRR at 25%; subsequent APT rates negotiable0%0%NA
NorwayCITNANANA27%6 years SL (offshore); 30% DB machinary first year, 20% DB after (onshore)Indefinite with uplift of 1.5% each year51% SPT, with 5.5% uplift for 4 years0%0%20% SDFI
PeruTax/Royalty0%-40%; R-Factor/DROP/PriceNANA30%20% exploration and development; SL4 years or indefinite if limited to 50% per yearNA4.1%4.99%NA
Tanzania (MPSA 2013)PSC12.5% onshore, 7.5% offshore; discharged by the state oil company50%Oil: 65%-90% Gas: 60%-85%30%25% SL on capital costIndefinite25% FANCP+35% SANCP; Real ROR10%10%25% min. carried to development
1US Geological Service, 2012, Republic of South Africa: Department of Mineral Resources.
2The period 1990 to 2008 experienced significant statutory reductions in the corporate income tax (CIT) rate: 1990 to 1991 (CIT rate of 50%); 1992 to 1993 (48%); 1994 (40%); 1995 to 1998 (35%); 1999 to 2004 (30%); 2005 to 2007 (29%); and from 2008 to present (28%).
3This analysis focuses on the design of the fiscal regime, comparing the South African regime with that of other platinum, iron ore and coal mining countries, using the same mine project examples described in Box A2, A3 -- A4. Other factors which are equally relevant for the investment decision and outcome, such as geological prospectivity, proximity to markets, quality of infrastructure, business climate, property rights, and political stability, are assumed constant.
4Total benefits mean revenue minus operating costs and replacement capital investment (the “cake” from which taxes are paid, debt is serviced, and equity providers are rewarded).
5Examples are based on an initial exploration period of 5 years during which 3 to 4 of exploration and appraisal wells are drilled. The project is then developed using floating production storage and offloading (FPSO) infrastructure over the subsequent 7 years, involving purchase of the capital equipment and drilling expenditure for production and water injection wells, the number of which would vary with the field size. Oil production commences in year 9 of the project, and after a production period of 18 years, the field is decommissioned (incurring additional expenditure).
6In addition, discoveries of associated gas could be evacuated onshore for domestic use in power plants, providing a potential upside to project economics.
7In reality, transport and refining costs between the fiscalization point and the reference market would imply a discount to the reference price. Since these prices are simply used for illustrative purposes and little is known about the size of such a future discount, no such deductions have been made from the headline price assumption.
8International Monetary Fund, 2012, Fiscal Regimes for Extractive Industries: Design and Implementation, Fiscal Affairs Department Paper (Washington).
9This analysis focuses on the design of the fiscal regime, comparing the South African regime with that of other petroleum-rich countries, using the 500MmBbl project example. Other factors which are equally relevant for the investment decision and outcome, such as geological prospectivity, proximity to markets, quality of infrastructure, business climate, property rights, and political stability, are assumed constant.
10Total benefits mean revenue minus operating costs and replacement capital investment (the “cake” from which taxes are paid, debt is serviced, and equity providers are rewarded).
11Current LNG import prices to South Africa is at Low Oil index pricing (12% x Brent - $0.50)/mmbtu in current market conditions.
12The 8 mines which were modeled are operated by the 4 entities reflected in Table 1 (see also paragraph 8). The significant decrease in CIT payments in 2011/12 is attributable to the major coal, platinum, diamond and copper mining entities in the group, only one of which forms part of the 4 modeled entities. Further information would be necessary to understand the causes behind such a drop in CIT levels. Large amounts of missing CIT data entries for tax year 2013 meant that this data was not analyzed.
13Where actual tax payment data is presented, this is intended to reflect tax paid on mining income. Adjustments have been made for the gold mining operations where sufficient data was available to isolate taxes payable on mining income. Calendar year adjustments have been made where necessary, along with assumptions to extrapolate trends where mine level data points were missing, most notably in the case of the second iron ore mine.
14Department of Mineral Economics Statistical Tables, available at http://www.dmr.gov.za/publications.html
15SA Treasury Tax Statistics 2014, available at http://www.treasury.gov.za/publications/tax%20statistics/
16This assumes a constant Rand/US$ exchange rate over the project life of 11.5Rand/US$.

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