TAX NEWS - JUNE 2010

Aussie Tax: Xstrata CEO Says Australia Tax May Lead to Canceled Investments

by Firat Kayakiran, 02 June 2010 -- Xstrata Plc Chief Executive Officer Mick Davis said Australia's proposed tax on mining profit may prompt companies to cancel investments in the country.

"Resources are immovable but diversified mining companies have a choice of countries in which to invest," he wrote in a letter today in the Financial Times. "Investments in Australian resources are at risk of being delayed or cancelled."

Prime Minister Kevin Rudd yesterday vowed to push ahead with plans to impose a 40 percent tax on natural-resource profits from 2012. Xstrata, the largest exporter of coal for power stations, along with BHP Billiton Ltd., the biggest mining company, and Rio Tinto Group, the third-largest, are campaigning for the government to dilute the proposals. Xstrata is based in Zug, Switzerland, Rio in London and BHP in Melbourne.

Plans to impose the levy retroactively introduce risks more akin to those faced in "developing countries," Davis said.

"The government has shown itself willing to breach investors' trust and damage the economic case on which multi- billion dollar investments were made," he wrote. "In developing countries, we manage this risk by availing ourselves of fiscal stability agreements. Sovereign risk concerns about Australia may once have seemed absurd. Sadly, today they are foremost on every mining company board's agenda."

Rudd's government has clashed with the mining industry over the definition of a "super" profit, which the proposed tax sets at returns above the long-term Australian government bond rate of about 6 percent. The nation's petroleum resource rent tax, also levied on profits at a rate of 40 percent and in place since July 1987, kicks in when returns exceed 11 percent.


'More Punitive'

The proposed tax "is fundamentally more punitive than the 40 per cent rent tax imposed on the petroleum industry" as it applies to current projects, Davis said. "The government refuses to consult on the key elements of its proposal; the petroleum tax involved two years of industry consultation."

The government says the overhaul gives Australians a fairer share of the nation's natural resources. The industry is paying one dollar out of seven in tax, down from one in every three dollars 10 years ago, Rudd said. The resources industry makes up about 10 percent of the $1.02 trillion economy of Australia, the biggest shipper of coal, iron ore and alumina.

The nation may price itself out of the market for investors because other countries are unlikely to follow its lead, Davis said. "Australia's resource taxation will be isolated as the highest in the world at 57 per cent," he wrote in the letter. "Many resource-rich nations regard this tax as an opportunity to gain a larger share of global mining investment."