the draft reviewed Mining Charter: Employee share ownership plans and the ownership element – playing the waiting game?

stonewallOne of the key elements addressed in the Draft Reviewed Broad Based Black-Economic Empowerment (“BBBEE”) Charter for the South African Mining and Minerals Industry, 2016 (the “draft reviewed Mining Charter”) is the issue of ownership.

The Department of Mineral Resources (“DMR”) seeks to achieve the ownership requirement through broad-based employee share option plans (“ESOPs”), which are likely to have an impact on both mining companies and their employees from a tax perspective.

The DMR published the draft reviewed Mining Charter in April, following an assessment of compliance by mining companies with the Amended Mining Charter of 2010. According to the preamble of the draft reviewed Mining Charter, this assessment revealed the following regarding the ownership element of the Mining Charter:

“Limited progress has been made in embracing the broad-based empowerment ownership in terms of meaningful economic participation of black South Africans. The trickle flow of benefits that ought not only to service the loan, but also include cash-flow directly to BEE partners, is vastly limited. To this end, the interests of mineworkers and communities are typically held in nebulously defined trusts, which constrain the flow of benefits to intended beneficiaries. As a result, the mining industry has broadly been faced with increasing tensions with both workers and host communities.”

In response to this, the draft reviewed Mining Charter provides that stakeholders in the mining industry must achieve a minimum target of 26% ownership per mining right to enable meaningful economic participation of black people. In respect of employees, this 26% stake must include a minimum of 5% shares equitably distributed among employees (in the form of ESOPs). This stake will be held in trusts created by the employees, and the trusts will have to be represented by unions and report to the South Africa Revenue Service and the DMR.

Shareholders of the black empowerment stake (i.e. the trusts in the case of ESOPs) must also create a special purpose vehicle (“SPV”) to manage the 26% black economic empowerment stake according to its own memorandum of incorporation, which addresses issues such as the appointment of joint representatives, allocation of voting rights, and dispute resolution. Further, the draft reviewed Mining Charter envisages that there must be a BBBEE transaction for each mining right granted and one SPV for each empowerment transaction. The mining right holders must, with the concurrence of the black economic empowerment (“BEE”) partners, consolidate the empowerment transactions with the prior written consent of the Minister of Mineral Resources.

The draft reviewed Mining Charter was open for public comment by interested and affected parties until 31 May 2016. In addition, the DMR has been in discussions with stakeholders since the draft reviewed Mining Charter was published, and it has promised a revised draft reviewed Mining Charter that will incorporate what has been agreed with the stakeholders. However, It is unclear when this revised version will be published and whether it will be in final form, promulgated and effective without further consultation.

The broad-based employment requirement of the ownership element is, however, likely to remain in the final version. This is because there are various advantages in implementing ESOPs to obtain and maintain BBBEE ownership in businesses. One such advantage for the employer company is a tax deduction of the cost of the BBBEE structure. However, this deduction may need to be spread over the period of the ESOP. The draft Taxation Laws Amendment Bill, which was published for comment on 8 July 2016, proposes a new section 8CA for the Income Tax Act,1962. This section provides for the deduction of the expenditure incurred in respect of a restricted equity instrument scheme. The deduction will be spread over the period that the equity instrument is restricted. The proposed section also provides for a recoupment of the deduction when an employee leaves the employment of the employer. This proposed section could be problematic if the ESOP’s term is lengthy or if the scheme is structured to be restricted indefinitely to ensure prolonged fulfilment of the objectives of the Mining Charter and BBBEE legislation. Another advantage is that employees could be locked in easier than other BEE partners, which is beneficial for the employee and the mining company, as the risk of having to restructure BEE ownership every couple of years is reduced. Also, the ESOP could be structured to be flexible to meet the respective organisation’s circumstances and the Mining Charter requirements.

Even though the draft reviewed Mining Charter may look different in its final form, one thing that will remain is the need to address the ownership element, and the tax implications for employees and mining companies. Notwithstanding the benefits of an ESOP, various changes to tax legislation in recent years have made it increasingly difficult to structure BBBEE shareholding where employees are involved, in a manner that employees are taxed on gains and dividends, as shareholders and owners of the business (i.e. capital gains tax and dividends tax), as opposed to being taxed on the gain and dividends similar to a bonus (taxed at the marginal rate of the employee, which is often a higher rate than tax on capital gains and the dividends tax rate). The proposed changes to section 8C in the draft Taxation Laws Amendment Bill seek to cast the net even wider. It is proposed that dividends consisting of proceeds from the disposal or redemption of any underlying equity shares to the restricted equity instruments will be included in the income of the employees.

This treatment is inconsistent and counterproductive to the objectives of the Mining Charter and BBBEE legislation, with regard to broad-based ownership opportunities for employees of mining businesses.

For many years, the Minister of Finance has mentioned in the annual Budget Speech that National Treasury is looking at reforming the legislation dealing with ESOPs. One hopes that the country’s BBBEE objectives are taken into consideration during this process. At this stage, it appears that the changes coming through in the amendments to the taxation laws relating to share schemes merely seek to cast the net wider with regard to amounts being included in the income of employees, as opposed to enhancing the taxation laws to bring them in line with, and to promote, the country’s BBBEE objectives.

In the meantime, and even more so if the changes in the draft Taxation Laws Amendment Bill are implemented, taxpayers should seek advice from tax professionals who understand and have extensive experience with regard to the complex tax legislation pertaining to ESOPs and broad-based share plans, and who understand and appreciate the requirements and complexities of the Mining Charter, the Mineral and Petroleum Resources Development Act and the BBBEE Act.

Further, tax professionals must ensure that the proposed structure is properly implemented in light of the many ingenious structures being incorrectly implemented, with abysmal consequences for mining companies and employees.

For more information on the draft reviewed Mining Charter, click here and here.

 

Kristel van Rensburg

tax | director
kvanrensburg@ENSafrica.com
+27 83 459 4959

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