TAX NEWS - June 2010

Australia Tax: Rudd Refusing to Compromise: BHP

The two companies with the most to lose from the proposed 40 per cent resource rent tax, BHP Billiton and Rio Tinto, have shot down expectations that the Rudd government is about to make meaningful concessions.

BHP chairman Jac Nasser has told shareholders that despite BHP's best efforts at convincing the government otherwise, there has been "no acknowledgment by the government of the major flaws of the proposed tax and the significant impact on the industry".

"Substantive redesign of this proposed tax is necessary and, if this can't address its fundamental failings, it should be abandoned," Mr Nasser said.

His comments, made in a letter to shareholders, come as speculation grows of an imminent change of direction by the government after the roadshow by Prime Minister Kevin Rudd to the mining states of Western Australia and Queensland.

Rio said it was wrong to suggest that there had been negotiations with the government during the consultation phase of the tax's introduction. "There have been no negotiations since the announcement [on May 2]. There are no negotiations being undertaken now," a Rio spokesman said.

The industry is worried that while some concessions could well be offered by the government in its efforts to convince the electorate that it has responded to industry concerns, the concessions will not go far enough.

It argues that applying the decades-old petroleum resource rent tax model to mineral resources "does not address most of the fundamental failings of the proposed super tax". Mr. Nasser reiterated the four "principles of sound tax reform" that BHP says are missing from the proposed tax".

The first concerns retrospectivity, with BHP saying any new tax should "not fundamentally change the rules of the game on existing projects, both as a matter of fairness, and so as to protect Australia's reputation as a stable place for investment".

BHP also argues that Australia will lose investment dollars to countries with more attractive tax rates under the proposed tax and that any tax should vary in rate according to the kind of mineral resources mined.

Its fourth principle is that any tax should be applied on the value of minerals alone and not "unintentionally penalise investments in infrastructure, processing or other support activities".

Meanwhile, in a London briefings, Rio chief financial officer Guy Elliott said any new tax needed to be introduced in a way that did not increase sovereign risk. "We have many other growth projects outside Australia," he warned. He was asked whether Rio's modelling of the proposed tax could affect Rio's long-run commodity price assumptions.

"If the tax went through unadjusted, it would have an effect on supply," Mr Elliott said. "The impact will be offset by superior growth from other countries, for example iron ore from Africa, Brazil, North America."