TAX NEWS - JUNE 2010

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Australia's Super Tax Threatens Global Trade Diplomacy Effort

ST. LOUIS -- The Australian Trade Commission is living the adage that no good deed goes unpunished. Taking advantage of a disengaged United States and Britain, and of a complacent Canada, Austrade has been spearheading one of the most successful trade diplomacy efforts of recent memory. That thrust is now dangerously blunted in the wake of Australian Prime Minister Kevin Rudd's determination to punish his country's most successful miners with a "resource super profits tax".

Nowhere has the trade diplomacy been more visible than in Austrade's aggressive efforts to secure foreign mining and mining service deals for Australian companies. The country is, or at least was, disinclined to cede the world to China just yet.

From Cape Town to London to Beijing, Austrade has been deploying an effective hearts and minds campaign that puts senior Australian diplomats in position to lobby, cajole, and pay a way into new opportunities. Close behind the diplomats and trade commissioners are swarms of Aussie miners, bankers, lawyers, consultants, and service types. They have penetrated once distant markets in considerable depth and breadth, especially in Africa and Asia.

Yet Austrade officials, who have been promoting low and simple tax regimes to foreign ministers of minerals and energy, now have some explaining to do. If the super tax passes, PM Kevin Rudd will have invited the inevitable - foreign countries applying the same curbs to Australian miners operating there.

The most damaging aspect of Rudd's money grab is that he is setting a precedent for government deciding the threshold for rates of return. This used to be a matter for negotiation in the market between stockholders and management. Now Australia has declared that investors have no right to expect more than a 6% return, whereafter they're going to get sacked with a 40 per cent tax. A return of 7% amounts to a super profit? A total effective tax rate of 57% is the new normal?

Needless to say, Rudd's team has made no reciprocal pledge to limit government's rate of return on taxpayers which is vastly higher than 6%. Nor is the government prepared to participate in any of the risk before a company gets to a point where the national treasury will siphon away more than half its profits.

It won't be long before an Australian company active abroad faces an "equalization" demand. And if a super tax is good enough for mining, then why not banking and other big earners for Australia.

Fortunately, Australian miners are made of stern stuff, and they are punching back harder than Rudd might have expected.

Fortescue has put two projects on hold; Rio Tinto and BHP Billiton are threatening to halt projects put at risk by the tax; Xstrata has acted by suspended nearly A$600 million in capex for coal and copper projects worth a cool A$6.6bn.

Rudd and his Treasurer, Wayne Swann, appear to have miscalculated; presuming they are not mostly incompetent. The latter appears to be the case as evidence came to light that Swann had no concept of equity risk premiumia, and as as his propaganda effort had failed miserably.

Perhaps most galling for the miners is that they almost single-handedly rescued Australia from suffering the depth of the American and European recessions. Without those projects in place, funded at considerable risk by investors, China's stimulus cash would have flowed to Brazil and South Africa rather than Australia.

Even if the super tax is defeated - and we think it may well be given the combined shareholder bases that are presently being mobilized - the damage has been done abroad.

What's an Australian High Commissioner to do if the PM is an idiot?
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