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Kumba pays the piper, sort of...

Feb 05 2017 06:01
Dewald van Rensburg

Johannesburg - Kumba Iron Ore will pay less than half of the tax bill it received from the SA Revenue Service (Sars) last year following audits of its export marketing practices during the commodities boom.

The settlement of R2.5bn significantly overshot the R1.5bn Kumba had set aside as a contingent liability.

It is, however, a fraction of the taxes, penalties and interest payments Sars was pursuing the country’s dominant iron ore producer for.

The existence of a potential tax liability was first reported to shareholders in June 2014, but Kumba could only put a number on it early last year when it received a tax assessment of R5 billion for the years 2006 to 2010.

Most of this consisted of interest and penalties, with the underlying tax bill from the boom years coming to R1.3bn.

Kumba said the tax assessment related to its subsidiary Sishen Iron Ore Company’s “overseas sales and marketing business”.

A few months later, Sars gave Kumba another assessment, for 2011, totalling R1bn excluding interest and penalties.

From the announcement of the settlement, it is clear that potential liabilities related to the years 2012 to 2015 are also being “fully and finally” settled.

The settlement follows a similar investigations into the transfer pricing activities of Evraz Highveld Steel, which resulted in a R685 million tax claim against the now-bankrupt company related to apparent tax evasion using an Austrian shell company between 2007 and 2009.

Kumba’s overseas marketing in the period the Sars bill related to was done via subsidiaries in Amsterdam, Luxembourg and Hong Kong. Since 2012, its international marketing has been integrated with the larger Anglo American group’s Singapore-based marketing hub.

According to an article from tax advisory firm BDO last year, the tax claim stems from sales commissions charged by the subsidiaries, an area open to abusive transfer pricing.

Anglo American owns 70% of Kumba.

The announcement of the deal with Sars was followed by a 5% drop in the price of Kumba shares on the JSE on Friday, but the company’s shares are still 90% more valuable than three months ago due to a recent resurgence in international prices for iron ore.

UPDATE 07-03-2017: This article has been amended since publication. The original speculated that SARS’ investigation into Kumba was sparked by a report prepared by audit firm KPMG. The KPMG report in question was cited by Sars as precipitating a similar investigation into Evraz Highveld Steel and Vanadium around the same time. The report was however prepared by the audit firm for Evraz, for submission to Sars, and did not deal with other commodity producers.

KPMG was not approached for comment, but approached City Press to point out the error.

City Press apologises.

kumba iron ore  |  sars  |  tax
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