Left in the cold
ABANDONED: Mining companies being left out in the cold

Mining companies miss out on tax amendments

The final session of the 11th parliament on Friday saw legislators pass a plethora of bills, among them the Income Tax Amendment Bill.

The bill is partly designed to provide provisions that restrict 100 percent deductions of interest expenses on certain companies.

Previously, banks and Insurance companies were the only institutions exempt from the restrictions.

According to the amendments, beneficiaries would now also include variable rate loan stock companies and micro, Small, Micro and Medium Enterprises (SMMEs).

An important point to note is that property developers who are not variable rate loan stock companies would not be exempt.

The amendment follows the passing of the Thin Capitalization Law enacted back in December.

The law was meant to limit interest expenses incurred by corporates as tax deductions.

In the past, every company could claim 100 percent of what is known as tax on Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA).

However, the law limited this to 30 percent – a move thatexperts feel effectively increased corporate tax.

Those in the know believe the decision to leave mining companies out of the amendment represents a huge blow to the industry.

Breaking this down for Voice Money, Tax Managing consultant Jonathan Hore explained, “It is common knowledge that mining companies need hundreds of millions in order to finance their operations. “The limitation of their interest expense would certainly lead to less expansion of the critical sector of the economy and reduce employment creation.”

Hore fears it could potentially result in prospective mining projects that were to be carried in Botswana being re-directed to other countries.

At the moment, profitable mining companies are taxed at 22 percent, a fee that can rise to 55 percent depending on their profitability.

“The more profitable the mine, the higher the tax rate. The interest limitation for tax purposes exacerbates the miners’ tax situation by increasing the tax bills of these already highly taxed enterprises,” clarified Hore.

In the past, struggling mining companies have decried limited funding by financers, to the extent of calling upon government to establish the Exploration Fund in order to finance the capital-intensive operations.

Hore also predicts that since SMMEs are no longer affected by the law, companies may consider reconfiguring their structures in order to qualify as SMMEs.

“Some may have to sell-off their shareholding to qualify as SMMEs so that their tax bill remains in check,” he noted.

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