Monday, May 10, 2010

"As a former head of the Minerals Council...

David Buckingham in today's Business Spectator:

"The broad contours of the debate around the federal government’s new Resource Super Profits Tax (RSPT) are now clear after a full week of debate. Broadly, there are three heavily contested lines of argument:

– Whether the resource sector already pays enough tax;

– Whether the new RSPT will overtax projects and damage the industry;

– What will be the way forward between government and the industry.

I’d like to draw on my experience and some analysis to comment on each of these.

Effective company tax rates

To start with, the sector has been very vocal that it is already very heavily taxed. This is worth subjecting to some scrutiny.

In this space, miners will always quote the 30 per cent company tax rate. They won’t talk so much about the other elements of the company tax system that are equally important, but far less obvious to the casual observer. For example, not many miners will talk about the concessions they enjoy under the company tax. But we all know that concessions like accelerated depreciation mean that the effective tax rate is well below the headline rate.

I was interested to find this point raised in the Australia’s Future Tax System review (the Henry review). The review team quotes a study by Markle and Shackelford which estimates how much these concessions reduce effective tax rates across different industries, and different countries. It finds that in Australia the biggest beneficiaries from concessions are information and mining sectors. Once you allow for concessions, the mining sector faces an effective company tax rate of 17 per cent, far shy of the 30 per cent headline rate...

New tax rates

The sector will respond that whatever the existing tax rates, the RSPT will tax them much more heavily.

This is a gross simplification of what is in fact quite a cleverly-designed tax.

Just how cleverly was shown in a table produced in a note by the Treasurer recently (and reproduced below) showing estimates of the effective tax rates applying to projects. What it shows is the very deliberate design of an RSPT to lighten the tax burden on less profitable projects, encouraging investment in the projects that might otherwise have stayed on the drawing board. Higher return projects face a higher effective tax rate under profits taxation compared to royalties. But even here, to face the very high tax rates the sector is complaining about, projects have to be very profitable indeed. Given these profits are made principally from the exclusive right to exploit a non-renewable resource owned by the Australian people, such tax rates are far from unreasonable.

Hysteria from the 1990s

Finally, I turn to the question of what the way forward will be for the government and the industry.

Ministers in this government will not have forgotten the scare campaigns of the past.

In the 1980s when the Petroleum Resource Rent Tax (PRRT) was mooted then introduced, the backlash was fierce.

These words by Alexander Downer sum up the anti-PRRT cause from those days:

“I think it is an extremely regrettable proposal; I think it is an ill-considered proposal; and, what is worse, I think it is an ideological proposal which is going to do very real damage to oil exploration in Australia. It is going to affect our balance of payments situation and it is going to affect the overall state of our economy. If this is to be one of the pieces of legislation which will form the general epitaph of the government, I think it is highly appropriate. It is an anti-production, anti-development, anti-profit and anti-export tax, and the government deserves to be condemned for the irrationality of that decision."

Of course, we all know what happened next:

In the words of the subsequent government review, tabled in Parliament in 1992, “The extension of the PRRT to the Bass Strait project has rejuvenated activity in the Gippsland Basin. New field development and infill drilling programs on extending development will significantly extend the life of the project and arrest the rate of decline in production.”

A similar pattern occurred before I arrived at the Minerals Council in the 1990s with the long and scarifying debate around native title. Australians were told native title would cause an investment strike, lost projects, lost jobs, exports and national income. As we all remember, the debate had some ugly features throughout.

Of course, we all know what happened next – native title legislation was passed, the sky did not fall in, and the mining industry went on to grow and prosper in the years that followed.

Would miners prefer a lower rate? Of course they would. It is worth making some noise, if there is any chance at all of a 30 per cent or even 20 per cent rate. Miners know that the best way to make noise is to threaten withdrawal from the market. They are not alone in this – it has all too often been the tactic whether the issue is executive salaries, taxation treatment of hedge funds/private equity, gold taxes, financial system reform, etc. The public interest requires that at some point a line, a balance, be drawn.

I think the government recognises this. It has already very clearly shown the path forward in resolving this conflict – a Resources Tax Consultation Panel, which was constituted the moment the tax package was launched.

That process has now been running for a week. More than 80 companies are said to be engaged with it. These are the companies that will shape what is an already effective tax design into legislation that works for the sector. The challenge for the players throwing rocks will be to decide whether they are in that process, or whether they will leave it to their competitors. I know which type of company will do better in the end.

David Buckingham is a former head of the Minerals Council

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