TAX NEWS - June 2010

Mining tax model right, tax rate wrong

A Canadian academic has applauded the model of the proposed resource super profits tax, but says the rate is currently too high.

Canada has been frequently referred to by parts of the mining lobby as a possible destination for the investment they say will be deterred from Australia by the new tax.

The Canadian trade minister has made light of the resource tax debate to spruik his country's moves to lower corporate taxes.

Professor Jack Mintz, an internationally renowned tax specialist from the University of Calgary, agrees the effective tax rate on new investment would increase under the current RSPT proposal and make investment in Australian resources less attractive.

However, he also says claims that it would make Australia the highest taxing country in the world for resources appear to be exaggerated.

"I'm not sure it's going to be the least competitive... but if you look at say the effective tax rate on new investments that would be taken on in Australia and compare that to, let's say some other regimes we've done in Canada and the United States, certainly the effective rate actually could be as high or even higher," he told the ABC's finance correspondent Phillip Lasker.

"It wouldn't be one of the highest in the world. I'm sure I can find some countries, for example in Africa and other places that might have very high effective rates, but I haven't done that kind of survey yet, so I can't say that with clarity."

Professor Mintz says his analysis shows the level of taxation on new and marginal investments would rise significantly and that might cause some companies to shift their priorities to overseas deposits.

"This is for marginal projects - these are projects that earn just enough to cover all their economic costs, including the payment of the new super tax - the super profits tax as well as corporate income taxes - the effective tax rate on new investments that'll take place in these projects is going to increase from 23 to 37 per cent," he said.

However, he says a talk of a massive exodus of mining investment is probably overstated.

"I'm not sure whether there'd be a massive outflow... because the ore is in the ground and it's available for exploitation and if prices are good enough, people will still want to invest and be able to extract ore," he added.

"But I do think that for many, let's say more high cost resource developments, they may be discouraged and there may be more interest to invest in some other parts of the world where the costs, including the tax costs are going to be more reasonable."

He says a tax rate of 30 per cent rather than 40 per cent may be more appropriate and competitive internationally, but adds that the uplift rate (the 6 per cent rate above which profits become taxable under the RSPT) cannot be altered without creating distortions in investment across the economy as a whole.

"Having a higher uplift factor is incorrect. The Government's already sharing the risks fully with the super profits tax. It's sharing 40 per cent of the investments, 40 per cent of the returns and 40 per cent of the risks," Professor Mintz said.

"I don't think it's appropriate to have any higher uplift factor otherwise you create distortions with respect to investment decisions."

Professor Mintz adds that Australia is not alone in implementing this kind of resource rent tax, but he says the rates in some other countries are lower.

"In Canada there's a very similar regime for the oil sands for example, as well as the BC [British Columbia] mining tax is a similar one as well," he said.

"I think the structure of the super profits tax is correct... it is truly a rent tax, it's a good one, I think it's structured well. It's an issue about the rate, and it's an issue about how it interacts with the corporate income tax."