By Hilary Mare
IN an effort to sustain the mining industry so that it can continue to make a vital contribution to the economy, the legislature should reconsider the tax treatment of rehabilitation expenditure taking into account the context under which such expenditure are undertaken, Deloitte Namibia has urged. Olivia Nghaamwa, senior manager for Namibia, and Gerda Brand who is the tax director at Deloitte Namibia have affirmed that the tax provisions should also take into consideration the different funding mechanisms that can be employed by taxpayers to fulfil their rehabilitation obligations.
“Such provisions should not be to the detriment of taxpayers and thereby deter them from complying with the relevant laws,” they stated in remarks that first appeared in the publication ‘Opportunities and developments Africa 2016’. They further reiterated that the mining industry in Namibia plays a significant role in the growth and development of the country’s economy and it is therefore important to ensure that all efforts are made to ensure its sustainability. During 2015, the mining industry contributed 11.9 percent to the gross domestic product of Namibia. Furthermore, the total contributions from the mining industry in the form of taxes to Government was approximately N$3.76 billion. From a regional perspective, Namibia is rated as the most attractive investment destination amongst other Southern African Development Community countries, followed by Botswana, South Africa, Angola and Zimbabwe. “Up until 31 December 2009, any ongoing rehabilitation expenditure as well as contributions made towards future rehabilitation expenditure were allowed as a tax deduction. The deductions were allowed to be made against income derived from mining operations. Thus, should a company not derive any mining income during a year of assessment, such expenditure incurred or provision of funds made could not be claimed as a tax deduction against income derived from non-mining operations.
“Furthermore, any amounts provided for future rehabilitation expenditure that were allowed as a tax deduction that were subsequently not utilised for rehabilitation purposes before or after the cession of the mining operations, should have been recouped and included in taxable income”.
With effect from January 2010, the specific section dealing with the deduction of ongoing and future rehabilitation expenditure was deleted from the Income Tax Act. The deletion is effective for years of assessment commencing on or after 1 January 2010.
Consequent to such deletion, mining companies would have sought tax deductions of ongoing and future rehabilitation expenditure under the general tax deduction section which contains several requirements that must be fulfilled before a tax deduction can be sought thereunder. The requirements are that the ongoing and future rehabilitation expenditure must be, actually incurred, in the production of income, for trade purposes and must not be of a capital nature. One would have to refer to case law for an interpretation of the underlined concepts as they are not defined in the Income Tax Act. This can prove to be a challenge and also makes room for different interpretations by different taxpayers. Should one be successful in fulfilling all the requirements of section 17(1)(a), it would mean that the deduction of ongoing and future rehabilitation expenditure will not be limited to mining income as that requirement was only contained in the deleted section. Therefore, where no mining income is derived in a year of assessment, an assessed loss can be created and utilised against non-mining taxable income or carried forward to subsequent years of assessment. In addition, such losses can be set-off against the income derived from other trades, i.e., income derived from non-mining operations other than interest. This could be beneficial to taxpayers in that they can reduce their taxable income from non-mining trades which was not necessarily possible in terms of the deleted section. “The provision of funds invested for rehabilitation expenditure will yield returns in the form of dividends or interest depending on the investment vehicle utilised. Dividends are generally exempt from income tax. Any interest however will be subject to tax either in the hands of the company (if direct investment is made) or the trust (if a trust fund is set up and depending on the legal nature of such trust), as the Income Tax Act does not specifically exempt such interest from tax. “Therefore, interest earned from the investment of rehabilitation funds could be seen as non-mining income and will be taxed as such. In addition, the Revenue Authority views such interest income as derived from non-trading activities and a result do not allow any deductions against such income or the setoff of assessed losses. This is to the detriment of taxpayers as such returns are derived as consequence of complying with the mining licence granted and not as profit making mechanism,” they extended.
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