TAX NEWS - June 2010
Quick truce unlikely in resource tax war
But this looks like a big ask after the miners' mutterings of a deal turned to dust this week, with BHP Billiton, Rio Tinto and Xstrata complaining their "fundamental" RSPT objections had received "no formal acknowledgment".
A deal outline may be forming. Exempt low value-added quarrying, as recommended by the Henry tax review; that's easy.
Allow Queensland's emerging coal seam gas industry to be covered by the less-onerous petroleum resource rent tax already applying to liquefied natural gas.
Provide more generous depreciation write-offs for other miners. Apply the tax as close as possible to the point at which the unprocessed raw material is extracted. And possibly ditch the 40 per cent tax credit for mining losses, the linchpin of Henry's elegant RSPT design.
But this is a long way from appeasing the miners as well as picking their pockets enough to meet the government's budget surplus promises. The unresolved issues even extend to why the Treasury's estimates that miners earned more "super profits" last year - $91 billion - exceed other measures of total mining company profits.
This is a threshold issue in Wayne Swan's vow to end the mining "rip-off"' of "windfall" profits. The argument is not over total mining profits but over the subset of "super profits" above "normal" profits. It's over the "rents" the mining companies extract from the publicly owned mining and energy deposits.
The painfully extracted Treasury numbers estimate that such "resource rents" ballooned to $91.2bn last financial year as pre-crisis Chinese demand drove up the prices of our iron ore, coal and other resource exports. But it provided scant information on how this could exceed other measures of total mining company profits: $63.6bn, according to the Australian Bureau of Statistics' estimate of mining pre-tax operating profit, or $74.1bn in EBITDA (earnings before income tax, depreciation and amortisation).
RMIT University's Sinclair Davis, who recently forced Treasury to correct one of its budget stimulus graphs, has used a computer program to extract the figure of $48.8bn of resource rent "mineral profits" for 2008-09 from a Henry tax review graph. The Australian Taxation Office estimates mining taxable income of $29.1bn the year before.
So whether the last year's $24.2bn royalty and tax slug on mining companies amounts to a "rip off"' turns on this measure of the miners' "windfall" profits.
With or without this debate, it is hard to accept the government's textbook assumption that the RSPT will have "no economic cost" and will actually boost mining production.
Even though a more efficient form of taxation, it clearly hits the net present value calculations on which mining companies base their project decisions. Number-crunching by Morgan Stanley suggests that BHP Billiton's massive copper and uranium Olympic Dam mine in South Australia would fail the required rate of return under the RSPT.
"We think under these fiscal conditions the project would be unlikely to be developed," its analysis says. That would mean the loss of $9bn or so of mining company taxes from 2018 to 2030 and more than $2bn in royalties to the South Australian government.
Yet Citigroup analysts separately suggest that investors have overreacted in clubbing BHP Billiton's share price in response to the RSPT, the collateral damage from BP's Gulf of Mexico oil spill, fears of a Chinese economic slowdown and the European sovereign debt crisis.
In its current form, the RSPT would decrease BHP Billiton's net present value by 11 per cent a share, Morgan Stanley calculates.
Rudd pounced on this week's BHP Billiton share recovery, to above the levels of the May 2 RSPT announcement, as evidence the miners are protesting way too much.
Labor's one clear non-negotiable item is the 40 per cent RSPT tax rate: the headline everyone can understand. It's crucial for ensuring that any deal is not portrayed as a weak political backflip.
But Ferguson, the Resources and Energy Minister, gave air to the miners' claim that "there is no one-size-fits-all model" for taxing mining super profits. Henry's RSPT design is based on the idea that there is.
The RSPT design feature of making the government a "silent partner" - by guaranteeing 40 per cent of losses as well as taking 40 per cent of the super profits - automatically deals with the varying risk characteristics of everything from petroleum to hard rock mining, Henry insists. But the BG Group's Australian chief executive Catherine Tanna took a different message to her meeting with Rudd, Swan and Ferguson.
The Queensland Labor government wants the PRRT, rather than the RSPT, to apply to BG's $12bn-$15bn plans to export liquefied natural gas out of Gladstone.
Labor paraded the meeting before the cameras. Tanna later described it as "productive". Ferguson hailed the "new industry" of coal seam-based LNG.
The deal between British-based BG and China's state oil company CNOOC was Australia's single biggest company-to-company LNG contract, worth 72 million tonnes over 20 years.
"I assure the Australian community that there will be a profits-based system in Australia that is accepted by industry," Ferguson said. The PRRT is profits-based, unlike the existing state government royalty regime. But, unlike Labor's new tax, the PRRT is prospective, applying only to profits from future investment.
At the least, BG needs to count its past capital investments - including the $8bn it spent buying the Queensland Gas Company in 2008 - at much higher than their depreciated book value.
That might fix one problem without hitting the budget's return-to-surplus projections, given that BG's LNG project will take several years to ramp up.
But it would set the precedent demanded by BHP Billiton, Rio Tinto and Xstrata: that the RSPT not be applied "retrospectively, so existing projects where investment decisions have already been made are not affected".
Labor can't do this because it would yield hardly any RSPT revenue for the next five years.
Despite this week's talk of a deal, the issues are surely too complicated to resolve so quickly. If so, Australia's great mining war will extend at least into July, when the government is scheduled to release its "issues paper", the result of its "extensive consultation".
© 2009-2012 TaxRates.cc
2011 - 2012 Tax Rate Guide and Tax Help Website
