beyondbrics

On the face of it, Australia’s planned mining tax is about a planned mining tax in Australia. But, as the ferocity of the debate suggests, it has global implications. The mining companies, which are utterly opposed to the government’s proposals, are well aware that Canberra’s plans are being watched around the world, not least in resources-rich emerging economies.

And executives are furious about the precedents that might be set. As one industry manager says, it is “the type of stunt you would expect in the Congo.”

Australia strikes a nationalist chord

Australia, one of the most developed mining countries, has jumped aboard a resources nationalism campaign which has been fought – in its latest form – over the last decade in many less-developed resources-rich states.

If Australia pushes through this tax, it could reinvigorate resources nationalism movements in these countries, whether in Latin America, central Asia or Africa. In the Democratic Republic of Congo, for example, a 2007 mining licences review remains unfinished.

Governments believe the commodities boom driven by Chinese and Indian demand has merely been interrupted – and not stopped – by the financial crisis. They see high prices – and they want a bigger share of the action.

Domestic reaction mixed

In Australia, the tax has polarised opinion. Mining companies say the planned 40 per cent ‘resources super-profits tax’ [RSPT] that would come on top of existing taxes is unfair and economically daft.

Australia’s Labor government says mining companies, which grew rich in the last commodities cycle, don’t pay their fair share to the motherland that owns the minerals.

The logic of the debate sometimes get less publicity than the rhetoric.

The government says the existing royalties-based system of taxing miners is inefficient. According to the government report outlining the RSPT:

The current charging arrangements fail to collect a sufficient return for the community because they are unresponsive to changes in profits, particularly [the] output-based royalties [system] … Existing resource taxes and royalties have collected a declining share of the return to resources over the recent period of increasing profitability for the resource sector.

The 40 per cent profits tax would not only raise cash (lots of it: a projected A$9bn per year) but simplify a state-by-state mess of tax regimes. Tom King, mining tax specialist at KPMG of Toronto, says:”There is no question that changes were due in respect to current [Australian] system, where there were imbalances. Australia did not get the right upside when they had spikes in commodity prices.”

Tough criticisms

But, King argues, “the way it has been done is not the right answer.”

Most Australian mining executives agree with the need for a new tax regime in principle, and some have pushed for profits-based taxes. But they have some tough criticisms of the current plan:

1) Market prices and capital spending follow different cycles. High corporate profits come and go with the commodity cycles, but capital expenditure is relatively constant. Miners sometimes take a decade or more to implement investments – and it is all sunk costs before the costly business of hauling the rock out starts to pay off. High profits today, in other words, are paying off investments from 10 years ago AND funding the next decade’s capex .

2) The “super-profits” threshold is too low. By saying a “super-profit” is anything above the long-term bond rate of approximately 6 per cent, the government is essentially saying that all profits are super-profits taxable at 40 per cent. Mining companies’ cost of capital is above six per cent and they typically only go through with projects that yield a 15 per cent rate of return or higher, because of the risks involved

3) The new tax rate should only apply to new projects. Existing schemes were undertaken assuming certain rates of return based partly on tax assumptions. Imposing big changes would damage some projects and kills others.

4) Taxes should vary by commodity. Some commodities are super-profitable, like iron ore today, and some are not (eg gravel). Super-profits taxes are feasible for some resources but should not apply at all to others.

Not the last word

For other governments in other countries the obvious conclusion is that there is nothing in these arguments, on either side, that is unique to Australia. If commodity prices stay high, expect more tax plans and more arguments.