Mining News

Resources Rent Tax

Posted by Cheryl Rutledge on 8/28/2014 2:19:30 PM

by Joshua Allsop and Kenneth P. Green

Continuing industrialization in developing countries suggests that demand for vital commodities such as metals and minerals will continue to increase. This increased demand will result in even greater interest in mining activities in both Canada and Australia. One form this interest may take is with regard to taxation.

In Australia, for example, the Minerals Resource Rent Tax (MRRT) came into force on July 1, 2012 and places a 22.5 per cent "super profits" tax on coal and iron ore producers. The most recent revenue forecasts by the Federal Treasury are in the Mid-Year Economic and Fiscal Outlook 2013-14, published in December. On the 21st of July 2014 the Australian government moved a step closer to abolishing the mining tax.

The Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, as it is formally known, does not only repeal legislation for the mining tax. It also amends the law relating to "superannuation, social security and family assistance and for other purposes”.

The tax in its latest iteration was designed to replace the confusing array of royalties that mining companies presently pay to the various states. Essentially in the current form any profit made by mining companies that is above 6% of their capital investment would be taxed at 40%, and all royalties presently paid to the states would be rebated.

Dr John Perkins, a senior economist with The Washington Post the tax arguing that resource prices are increasing rapidly because there is not adequate global production capacity allowing global miners to make profits from this growth.

In a statement on the new Australian budget Brendan Pearson, CEO of The Minerals Council of Australia, said the fiscal burden is now spread and the mining sector will continue to do a lot of the heavy lifting.

"We've got $3.7 billion in new tax charges which will primarily hit the mining sector. They relate to changes to exploration deductibility, costs of mining rights, new research and development requirements and a revision of the thin capitalization ratio,” he said.

The Queensland Resources Council has called the Budget a “mixed bag” of positive and negative measures for the mining industry.

Those who support the tax would be advised to study the case of Mongolia. Stephen Batholomeusz has written a nice piece outlining the details. Bloomberg has a more recent piece here. In Mongolia, under new mining laws the government interest equates to that of an actual investor. On one Rio Tinto mine it has a 34% stake in the mine. It now wants to renegotiate the contract that it has with Rio. Sovereign risk could well be an issue here; however, at the heart of the dispute is an argument about profits.

Due to their unique position on all mining projects the Mongolian government is heavily focused on cost reduction. This is because the cost is now partly borne by the investor, the Mongolian government, in terms of ‘revenue take’ from mining activities.

This has also had an interesting dynamic in terms of exploration projects. A number of projects have been turned down after negotiations with the Mongolian government. It seems the security required by companies over long term projects is also reflected in the Mongolian Governments ‘investment’ strategy.

Within Australia one issue with the new form of the tax is the ‘management fees’ charged by a subsidiary of the main company. In accounting terms these are a cost to the project (so profit falls) but are actually just a transfer between one part of the business and another part. The part of the company liable to pay tax would make less profit but part of the company not subject to the tax makes more profit.

More generally, any profit a mining company makes depends on the costs and a real risk of a tax is that the relevant companies have an incentive to shift every possible cost to Australia and take revenue overseas.

In contrast, simple resource rent taxes, levied, for example, on output, are much more enforceable. This is not a new issue in taxation – but it is one that can be easily forgotten by commentators after a ‘first best solution’ is proposed.

Mongolia’s progress in recent times could make the country a better mining prospect. In the 2013 edition of The Fraser Institute’s Annual Survey of Mining Companies, Mongolia rated 13th from the bottom in the overall Policy Perception Index (out of 112 jurisdictions).

On the other had Australia rated very highly in last year’s Survey of Mining Companies. Western Australia in particular rose from 15th in 2012/2013 to rank 6th on the Policy Perception Index. This could change in the coming results from the 2014 Survey.

Moody’s has recently downgraded Western Australia’s credit rating adding to concerns that the mining economy is struggling. The Australian Government has lacked clarity on the issue of resource tax and stated that investment decisions have been hindered due to the tax. If the Abbot Government is able to repeal this tax then mining investment may be more attractive over the coming years.

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