TAX NEWS - 2010

China tax changes

China tax changes: Australia is not alone with tax issues. China is also upsetting one of its key industries with tax changes, though not to the point where prominent people can be counted among the losers, which include Kerry Stokes, Stan Perron and former Premier Richard Court.

Those three are high on the share register of Iron Ore Holdings, one of the darlings of speculative share traders and a company which hit the headlines last year after stitching up a rail and port deal with WA's biggest iron ore miner, Rio Tinto.

Based on what's happened to the IOH share price over the past three days Court is about $400,000 poorer, Perron has lost $700,000, and Stokes a more substantial $27 million.

It was a different story a few months ago when news of the Rio Tinto deal rocketed IOH up from a low of 60c last October to a peak of $2.71 in April, a 350% gain in six months - or an annualised 700%.

IOH started to go off the rails immediately after the Australian Government said it wanted to impose a mining super-tax. From $2.26 just before the May 2 tax announcement IOH plunged over the next five trading days to $1.38.

Worse news came on Monday when IOH said it was in disagreement with Rio Tinto, and if the matter was not resolved by August 8 the rail and port haulage arrangement was off.

No-one is saying why the two companies have fallen out, though it is significant that the only big event since the original arrangement was announced last year is the mining super-tax, a potential impost which has cut the value of all assets and caused the big miners to reconsider (and revalue) all deals.

Personal relationships are likely to be stretched by the IOH affair with Stokes sitting at the same WA Newspapers board table as Rio Tinto's local boss, Sam Walsh. Even though he has a fortune estimated at around $2.3 billion Stokes will not appreciate being seen as $27 million poorer, especially when a man at the same table might have had a role in the paper loss.

In China, the losses from a tax change are far more substantial and could cause a dramatic shake-up in the country's steel industry - with flow-on effects to the Australian iron ore industry.

On June 22, but drowned out by the G20 summit in Toronto, China quietly announced the dropping of export tax rebates on a range of products, including steel.

The tax rebate, essentially a payment from the government to steel mills to help boost exports as part of China's post-GFC economic stimulus package, was the equivalent to around 9% of the value of the steel being shipped out.

Three of the expected results of the tax rebate being eliminated will be to push up the price of steel on the world market, push down the price of steel in China, and severely damage the profitability of small Chinese steel mills.

Australian iron ore exporters will be watching the rebate repercussions closely because it could mean reduced exports to China, but increased exports to other Asian customers such as Japan, Korea and Taiwan.

Who said tax was a boring subject?