Exxaro uses the International Integrated Reporting Council's (IIRC) Integrated Reporting <IR> Framework to present tax considerations in creating value over time.

In this report, we discuss Exxaro's oversight of our external environment, key stakeholders, material risks, tax management and governance.

This report should be read together with Exxaro's 2020 integrated report, available online under the investors tab.

INTERNAL AND EXTERNAL ENVIRONMENT

Taxation is an integral part of our business and the natural outflow of each business decision. It can be managed effectively within the parameters of tax law to support Exxaro's endeavour to create value and apply good corporate governance. Value creation regarding taxation is best understood in terms of external and internal influencing factors.

Regulatory changes and challenges

Carbon tax

South Africa's Carbon Tax Act, 2019 (Act 15 of 2019) (the Carbon Tax Act) and the Customs and Excise Amendment Act, 2019 (Act 13 of 2019) (the Customs and Excise Amendment Act) were effective from 1 June 2019. The Customs and Excise Amendment Act contains provisions for carbon tax revenue collection by the South African Revenue Service (SARS).

Taxpayers may be liable for carbon tax if they are above the threshold for one of the activities listed in Schedule 2 of the Carbon Tax Act. Carbon tax is levied on greenhouse gas (GHG) emissions from fuel combustion, industrial processes and fugitive emissions, as determined by the Department of Environmental Affairs reporting methodology.

Emitters are required to license their activities liable for carbon tax. Payment of this annual environmental levy is due in July every year.

In a strict legal sense, carbon tax is a levy and not a tax. It is an environmental levy, as contemplated in section 54A of the Customs and Excise Act, 1964 (Act 91 of 1964). Carbon tax administration, collection and payment are regulated by the Customs and Excise Act. An amendment to the rules of the Customs and Excise Act was gazetted on 23 December 2019 to provide for carbon tax licensing and registration.

We submitted applications for five licences in July 2020 for the following legal entities in Exxaro's group of companies:

• Exxaro Coal Proprietary Limited (EC)
• Exxaro Coal Mpumalanga Proprietary Limited (ECM)
• Forzando Coal Mines Proprietary Limited (Forzando)
• Dorstfontein Coal Mines Proprietary Limited (Dorstfontein)
• Exxaro FerroAlloys Proprietary Limited (FerroAlloys)

FerroAlloys and ECM received their licences in February 2021 only and therefore, carbon tax payments of R2 million could not be made for ECM's underground Matla mine on 29 October 2020. The liability was accrued in the financial results. As FerroAlloys' carbon emissions were below the payment threshold for the 2019 tax year, no payment was due in 2020. Carbon tax payments of R1.3 million for Forzando and Dorstfontein were made in 2020 relating to the 2019 tax year. EC only has opencast mines with a zero emissions factor, as established by the intergovernmental Panel on Climate Change. As such, no carbon tax payments were due in 2020.

Carbon tax accrual for the 2020 assessment, is R5.5 million and is payable on 29 July 2021.

Royalty taxes

Minerals royalty payments and submissions were filed manually in 2020 as the SARS e-filing platform did not launch in 2020.

In 2018, Mafube Mining Proprietary Limited (Mafube), a 50/50 joint venture with Anglo American, received an additional assessment of R280 million for royalties, including interest and penalties. Mafube objected to the assessment, but SARS disallowed the objection. An Alternate Dispute Resolution process did not address the above and Mafube therefore lodged an appeal on 19 June 2019. In December 2019, SARS indicated that they were willing to negotiate a settlement, which Mafube declined. The grounds of appeal was lodged on 9 November 2020 and a court date is now awaited.

Diesel refunds

After more than three years, EC and ECM diesel rebate refunds have not been finalised. SARS issued a letter of intent at the end of 2020, notifying EC of its intention to disallow the claim of approximately R434 million. SARS granted EC an extension to submit additional documentation to support the claim. SARS also requested a second visit to EC operations, which was scheduled for 14 January 2021 but was postponed due to stricter COVID-19 regulations. EC appointed advisers to assist in compiling the documentation to support the claim. They are confident that the claim is defensible.

SARS also requested further information from ECM and a visit to Matla in December 2020. ECM is compiling the requested information. The mine visit was scheduled for 14 January 2021 but was postponed due to COVID-19 restrictions. To overcome the COVID-19 restrictions various virtual meetings were held with SARS where presentations were made explaining the mining operations.

Separation of the diesel refunds from the value added tax (VAT) system will be completed in the 2021 tax year. Outstanding diesel refunds complicate tax compliance and put significant pressure on cash flow.

COVID-19 concessions

Tax measures were introduced on 29 March 2020 in response to the economic impact of COVID-19. The concessions help compliant businesses retain cash flow and provide incentives to retain their lower-income employees. However, economic conditions worsened and as a result, the minister of finance provided a second set of measures to assist taxpayers through the pandemic.

Exxaro benefited from the following relief measures:

• During 2020 Exxaro made a R20 million donation to the Solidarity Fund. An additional 10% deduction stemming from the donation could be claimed by Exxaro Resources Ltd (ERL). ERL was unable to claim the full benefit of the R20 million donation in 2020 assessment due to low taxable income. ERL is able to carry forward the unused portion to subsequent years
• The first carbon tax payment deadline was moved from 31 July 2020 to 31 October 2020. SARS also allowed electronic submission of carbon tax licensing documents
• A four-month payment holiday for skills development levies was granted in May 2020
• Implementation of certain of the 2020 budget measures was postponed until at least 1 January 2022. This includes restrictions on assessed losses and interest expense deductions

Exxaro also considered other COVID-19 relief measures including the deferral of employees' tax liabilities and provisional income tax payments for its smaller operations falling under the R100 million gross income threshold. The company decided not to opt for these measures since the administrative challenges would have outweighed their benefits.

We could not fast track VAT refunds by SARS, as the relief measure was only available to smaller VAT vendors. Exxaro could also not benefit from the additional subsidies under the Employment Tax Incentive because our employees do not fall in the "below R6 500" earnings bracket.

Tax digitalisation

Robotic process automation (RPA) and artificial intelligence (AI) are assisting the Exxaro tax function to become a valued strategic partner by improving efficiency and effectiveness. RPA eliminates repetitive, time-consuming manual tasks. Plans for digitally automating the tax function include, among others:

We engaged with leading experts in this field to understand the costs of implementing these solutions and the processes involved to implement. Funds are budgeted for 2021 to implement certain of these projects.

Exxaro's offshore tax structure

Exxaro is a multinational enterprise and as such, we submit master and local files as well as a country-by-country report to SARS.

We have business interests in Switzerland (marketing coal) and Australia (prospecting operations at Moranbah), and equity-accounted investments in China (Chifeng Kumba Hongye Zinc Company Limited) and Israel (LightApp Technologies Limited).

As a result Exxaro reports these offshore entities as controlled foreign companies and imputes their income in terms of section 9D
of the Income Tax Act, 1962 (Act 58 of 1962):

• Exxaro International Trading AG (EITAG) (Switzerland)
• Exxaro Base Metals China Limited (Hong Kong) - liquidated in 2020
• Exxaro Australia Holdings Proprietary Limited - previously Exxaro Australia Iron Holdings Proprietary Limited
• Exxaro Australia Proprietary Limited

Stakeholder engagement

Honest and transparent engagements with stakeholders on tax matters are summarised below.

		Stakeholder group		Key concerns and expectations		Our response
		SARS		Non-compliance with tax laws causes reputational damage and financial loss Capacity constraints due to ongoing SARS audits and information requests Complex restructuring transactions or sale/acquisition of investments/assets expose Exxaro to adverse tax consequences Complicated and regular tax legislation changes pose risks		Regular interaction with SARS relationship manager to build trust and support ethical behaviour – guided by the King IV Report on Corporate Governance for South Africa, 2016 (King IVTM)* Manage tax risks within a board-approved framework Transparent behaviour with prompt response to requests, audits, voluntary disclosure programmes and detailed tax return submissions VAT analytics tool identifies incorrect treatments Regular revision and external audit of transfer pricing policies Use Tax Ombud to ensure SARS is administratively compliant and upholds service charter for refunds and finalising audits Employ qualified people and manage their performance Engage with expert legal advisers for transactions: With tax impact above R10 million Acquisition and sale of investments Projects in foreign jurisdictions Group restructuring projects
		Financial reporting audiences (shareholders and financiers)		Tax reporting does not fairly represent Exxaro's financial position		Automated tax consolidation tool developed by Deloitte to calculate tax disclosure required by IAS 12 accounting treatment for income taxes Qualified professionals manage tax reporting
		Communities		Communities in the surrounding areas where Exxaro operates are not benefiting from money spent on approved public benefit activities		A non-profit company (with section 18A status) was established in the prior year for the benefit of Exxaro employees and communities in the surrounding areas where Exxaro operates. Senior employees are directors of the non-profit company (NPC) to ensure compliance with applicable laws and governance

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