TAX NEWS - June 2010

Australia Considers Changes to Resource Tax

MELBOURNE — Australia's government signaled Wednesday it will consider changing the way its planned new mining tax is applied to some parts of the resource sector, but mining giants BHP Billiton, Rio Tinto and Xstrata PLC said little headway has been made toward a compromise despite fresh talks.

The planned resource-profits tax has been met with furious opposition from the mining sector since it was unveiled May 2. The government has been eager to show progress in talks with industry, but comments from the miners themselves suggest Canberra isn't near delivering what they would consider an acceptable compromise. The tax still must be approved by lawmakers ahead of its planned 2012 introduction.

BHP Chief Executive Marius Kloppers, Rio Tinto Australia Managing Director David Peever and Xstrata Coal Chief Executive Peter Freyberg met with Resource Minister Martin Ferguson in Canberra early Wednesday. The executives argued that the tax shouldn't apply to existing projects and said it could damage Australia's competitiveness as an investment destination.

"At present there is no formal acknowledgment from the government that these key issues will be addressed," the mining giants said in a statement.

Rio Tinto also highlighted the unresolved issues in a letter to shareholders Wednesday, in which it lambasted the government for its lack of consultation and for a policy it said was damaging and divorced from commercial reality.

Prime Minister Kevin Rudd, who has seen his popularity with voters plummet as the mining debate intensifies, told reporters the government is considering companies' individual circumstances and is "serious about generous transition arrangements," but he reiterated his belief that the headline rate of the tax—which would be levied at 40% on profits above a rate of return of 6%—is "about right."

Mr. Ferguson, the resource minister, said productive talks with the industry are under way, and while there will be no "special deals," he indicated the government will consider varying the point in the production process at which the tax could be applied.

Mr. Ferguson said he has heard arguments from the petroleum industry, producers of low-value resources such as sand and gravel, and the mineral sector, and they are each arguing that there is no one-size-fits-all model.

"I am conscious of the fact that in transitional arrangements there are different arrangements in petroleum as against for example some minerals products," he said.

Referring to Australian steelmaker OneSteel Ltd., he said, "what are the taxing points, for example? What is the potential solution to OneSteel? We'll make sure … we take on board the special nature of their operations."

"The issue of taxing point is central to our considerations," he said.

OneSteel has raised concerns about the viability of its steelworks at Whyalla in South Australia state under the new tax, which the company says would apply equally to the hematite iron ore it sells and the low-grade magnetite iron ore it mines in the same town for use in the production process.

OneSteel said in May the tax would have a "major and immediate" effect on the competitiveness of its mining and steelmaking operations, and it argued the tax shouldn't apply to resources consumed internally.

The heated stand-off over the tax has seen the government and the mining industry trading insults and arguing over the tax rates currently paid by miners and the potential impact of the new tax on investment in the industry.

In his letter to shareholders, Rio Tinto Chairman Jan du Plessis said the company supported tax overhauls that would enhance the competitiveness of the Australian economy, but that the proposed resource super-profits tax wouldn't achieve this.

"The government's proposal will penalize efficiency, discourage competitiveness, curtail investment and limit jobs growth," he said. "It has been developed in a vacuum and is divorced from the day-to-day realities of business."

Mr. du Plessis said the company was particularly concerned by the application of the new tax to existing projects, which he said would undermine the stable tax and regulatory environment needed for commitment to mining projects that could take decades to pay back the investment.

BHP Billiton's Mr. Kloppers has said that the giant expansion of the Olympic Dam copper and uranium mine in South Australia is an example of a project that would be affected by the tax, and Morgan Stanley analysts said Wednesday they didn't believe the project would go ahead if the tax were passed in its current form.

Morgan Stanley said base metal and thermal coal projects would struggle to make a return under the new tax and that major changes were needed to the proposal, including cutting the rate of the tax to 20% and raising the threshold at which it kicked in to as high as 15%.

While ruling out any change in the rate, Mr. Ferguson said the government is getting closer to a solution to the stand-off after having discussions with a range of employers across the resource and energy sectors.

"Their willingness now to seriously discuss the issues with government and to inform the process, I suppose, from an overall point of view, does enable us to expedite our thinking," he said.

In a sign the government may be working on some form of compromise, Mr. Ferguson canceled plans to attend a meeting of Asia Pacific Economic Cooperation energy ministers in Japan this week to continue negotiations with industry.