Tax Court Rules Against SARS in Mining Royalties Dispute
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In a recent judgment by the Tax Court, Johannesburg, a mining company, referred to as MPT, successfully challenged SARS’s method of calculating royalties for platinum group metals (PGMs). The court ruled that SARS’s method was overly simplistic and did not align with the law or the realities of mining operations.
Case Background
MPT, a subsidiary of a listed group, produces PGMs and sells them in concentrate form to a related company. The concentrate’s average grade is below 150 parts per million (ppm), the threshold for “unrefined minerals” under the Mineral and Petroleum Resources Royalty Act (Royalty Act).
Because the grade was below 150 ppm, SARS adjusted MPT’s figures for 2015 and 2017 using a method that artificially increased (or “grossed up”) the company’s gross sales and earnings before interest and tax (EBIT), to reflect what they would have been had the concentrate met the 150 ppm standard.
Key Issues in the Case
Royalty Calculation Method
SARS applied a straight-line gross-up to adjust MPT’s figures. MPT argued that this approach was flawed and did not consider the inverse relationship between grade and recovery. Higher grades do not necessarily mean higher value — in fact, forcing upgrades can lower overall recovery and be uneconomical.
Interpretation of the Royalty Act (Sections 5 & 6)
These sections require SARS to make a hypothetical adjustment when minerals are sold below the standard grade. The question was: how should that adjustment be done? SARS took a strict view, applying a mechanical formula, while MPT proposed a more practical, evidence-based approach.Finality of 2016 and 2017 Returns
SARS claimed MPT could not challenge its earlier self-assessments for these years. But the court found that, since SARS had issued additional assessments, those figures were not final and could be reviewed.
The Judgment
The court ruled in favour of MPT and set aside SARS’s additional assessments for 2015 and 2017. It held that:
SARS’s straight-line gross-up was unreasonable, especially in light of expert evidence on mining operations.
The Royalty Act allows for flexibility and must be applied in a way that reflects real-life commercial and technical factors.
SARS’s interpretation would lead to illogical and unfair results, like taxing a company on revenue it could never earn.
The court also criticised SARS for failing to meaningfully engage with MPT’s alternative calculation and expert evidence.
As a result, the court ordered SARS to reassess the royalty taxes using a fairer method and to pay MPT’s legal costs.
Conclusion
This ruling sends a clear message that SARS cannot apply a one-size-fits-all formula in complex tax matters like mineral royalties. It must take real-world factors into account and exercise its powers reasonably. For mining companies and tax professionals, this decision sets a precedent for challenging royalty calculations that don’t reflect operational realities.
