Tax governance

GOVERNANCE OVERSIGHT

Exxaro is committed to complying with the code of corporate practices and conduct set out in King IV. In terms of this code, Exxaro's board and audit committee assume responsibility for managing tax risks and ensuring that Exxaro's tax strategy is aligned with its business strategy. Tax and tax risks are always on the audit committee's agenda. Operationally, the group tax manager is accountable for this function, reporting directly to the group finance director.

The corporate tax function is organisationally and physically separate from the finance function and centralised at Exxaro's head office. In the prior year, the Exxaro corporate tax function was not responsible for tax compliance, control and management of indirect taxes, such as VAT and PAYE, but only acted in an advisory capacity when required. During the second half of 2021, VAT management, control and compliance responsibilities moved to the Exxaro corporate tax function. Previously, the VAT responsibilities were part of the group transactional accounting function. Exxaro employed a dedicated senior tax consultant who will be responsible for VAT.

The group tax manager reviews tax implications of projects presented to the investment review committee and executive management committee to keep the tax function informed of transactions at inception stage, particularly decisions with significant impact. This ensures effective tax planning and TRM for operational cost savings.

Exxaro's stakeholders can anonymously report any concerns, breaches of Exxaro's ethics code, fraud or misconduct that includes tax matters on an independent platform.

POLICIES AND CONTROL

The board approved the TRM framework in 2017. The framework was last updated in 2019 and submitted to the board in March 2020. Standard operating procedures for VAT and diesel refunds in terms of the diesel rebate scheme are being developed and will be incorporated in Exxaro's TRM policy in 2022. Standard operating procedures for carbon tax have been completed and will also be incorporated in the new TRM policy. An updated TRM policy will be presented to the board (through the audit committee) for approval in 2022. TRM policy updates have been delayed to incorporate the use of the new tax compliance dashboard, expansion of the existing VAT dashboards, and changes to VAT controls and procedures since the change in the governance of Exxaro's VAT function.

The group tax manager is responsible for implementing and monitoring compliance with controls and procedures prescribed by the framework as well as identifying, analysing and evaluating the impact of events and associated risks on the group's strategic objectives.

Our board, audit committee, executive management, and other internal and external stakeholders, are informed about TRM activities. Stakeholder expectations and requirements, as well as Exxaro's open and transparent reporting objective, drive risk reporting.

The group tax manager provides quarterly and bi-annual reports to the audit committee on:

• Status of compliance with income tax filing to local and offshore tax authorities
• Status of significant tax disputes, audits and inquiries by authorities
• Significant tax developments affecting the business
• Significant tax risks identified (graded as likely to occur, with a tax impact above R10 million, where controls are inadequate to mitigate identified risks)
• The tax effect of material transactions such as acquisitions and disposals of assets, investments and businesses

Exxaro maintains transfer pricing policies for offshore transactions with connected parties. In addition to applying the local tax laws of the jurisdictions in which we operate, we follow the OECD's principles on transfer pricing and other international tax matters to ensure we pay tax in the jurisdictions in which we operate.

Our tax function upholds group document retention policies and uses the SARS e-filing system as an additional document database.

ASSURANCE

Exxaro mitigates tax risk by four lines of defence:

• Line of defence 1: Daily operational management and controls
• Line of defence 2: Executive committee and audit committee oversee operational management
• Line of defence 3: Internal and external assurance of TRM on an ad hoc or rotational basis for objective, independent appraisal of the framework and processes
• Line of defence 4: SARS performs ad hoc audits to ensure compliance with relevant tax legislation

Internal audits

Our internal auditors conducted the following internal audits during 2021. The results of the audits are listed below. All internal audit findings were cleared by 31 December 2021. Standard operating procedures were adjusted to address internal control deficiencies.

Each internal audit finding is classified as Level 1, Level 2 or Level 3.

Level 1 - High

• Observations which could cause material financial, regulatory or reputational risk at a Company level.
• Deviations from the Exxaro's approved Code of Ethics.
• Material deviations from the Exxaro's approved policies.
• Multiple individual control failures which could result in multiple control objectives / risks not being appropriately mitigated.

Level 2 - Medium

• Observations which could cause material financial, regulatory or reputational risk at business unit level.
• Material deviations from the business unit approved policies.
• Individual control failures which could result in a single control objective/risk not being appropriately mitigated.

Level 3 - Low

"Housekeeping" matters which require management action in the normal course of business.

The level 1 finding for the diesel rebate process was largely due to uncertainty around the logbook requirements as SARS' regulations are uncertain and continuously changing.

Based on the outcome of internal audit processes and SARS' audits, the disallowance of diesel rebate claims has been identified as Exxaro's top tax risk. The most recent diesel rebate audit, concluded in December 2021, showed an improvement from 20% to only 2% of diesel rebates disallowed by SARS. The risk has been discussed extensively at executive management meetings and reported to the audit committee. Refer to treatments discussed under material tax risks.

SARS audits

The following SARS audits were conducted during 2021.

OPEN YEARS OF ASSESSMENTS

The following tax years are open to SARS for assessment. Income tax filings to the SARS prescribe after 3 years in terms of the Tax Administration Act and 5 years in terms of Swiss tax legislation.

Only entities classified as major subsidiaries or material to the Exxaro group have been listed. A major subsidiary represents 25% or more of total assets or revenue of the consolidated group results (JSE Listings Requirements service issue 25). Material entities do not meet the 25% criteria but this is material to the group.