Tuesday, May 25, 2010

Australian mining, corporate tax and royalities

Australia's Australian Labor Party federal government knew it would generate a storm of industry and political protest when it unexpectedly announced the introduction of a Resource Super Profits Tax (RSPT) on mining companies commencing on 1 July 2012. Profits made on Australia's non-renewable resources will be taxed at a rate of 40% which will cut in at the government’s bond rate of 6%.

Australia’s national government is responsible for determining all personal and corporate taxation and excises (the states lost this right over 65 years ago) and controls offshore resources. However Australia’s individual states constitutionally own and apply royalties to all resources in their territory. The new federal ‘super tax’ is meant to assert federal financial control over state royalties – and sharing resource revenues to other sectors as it solely determines - by including a federal tax rebate to companies that pay the state royalties.

While the pros and cons of the tax are complex, mining companies are overwhelmingly opposed. So too are most economists and business commentators. As prominent writer Alan Kohler observed: "We have suddenly a relative sovereign risk problem. On top of a 10 per cent valuation adjustment to our mining companies’ share prices because the new tax will apply to existing projects, bankers are taking Australia off their lists of preferred locations for lending on resources projects - and everything else for that matter - because they think that the politicians here have lost their minds and gone anti-business.

"So suddenly it’s impossible to finance a new mining project. Companies that have projects all over the world, like Rio Tinto and BHP Billiton, simply shuffle ones in other countries to the top of their priorities list and displace the Australian projects, but those with only Australian orebodies, like Fortescue Metals and ERA, are stuffed. Those that are listed here and only have foreign mines, like Lihir Gold, are big winners.

"It’s all pretty disheartening in the midst of a difficult period of global deleveraging. The tax will not get up in its present form, but over the next 18 months till the RSPT bill is supposed to be presented to Parliament, we could be left behind."

Verballing the miners

However, with Prime Minister Kevin Rudd's popularity already dropping dramatically due to public perception that his policy changes are hasty, uncosted and more spin than political courage, his government's parallel verbal assult on the mining sector has been unnerving to the public and investment community.

The ALP's parliamentary, grassroots and trade union wings appear united in this current castigation of miners, the strongest since Rex Connor, Minister for Mines & Energy in the ALP federal government of Goygh Whitlam during 1972-1975, campaigned on economic nationalism. Based on a report by a former journalist who was then working for him, Connor criticised the mining industry for being ‘foreign owned” and for not contributing its fair share of tax revenue. Before being sacked for impropriety, he complained of a ‘strike by capital’ as major investment dropped and projects were shelved.

The leader of the Liberal Party at that time, Malcolm Fraser, now describes the Rudd government as “totally incapable” of administering a straightforward program: “The administrative failures (of the Rudd Government) are gross, and half of them aren’t pursued by the Opposition. The administrative failures are as great, if not greater than the administration failures in Gough Whitlam’s Government,” he told ABC TV’s Q&A last night.

In defence of Rudd’s proposed new ‘super tax’ on mining companies, his Treasurer, Wayne Swan, and Deputy PM, Julia Gillard, have relied on a US-paper which, they claim, shows that mining companies pay only 13%-17% in corporate tax. According to the following statements, the paper “had not yet been peer reviewed or published” (co-author), the edition of the paper referred to by Swan and Gillard was a draft and the 2010 update drops the 17% claim, and Australian Taxation Office statistics show “mining companies paid tax at a rate of 27.81 per cent in 2007-08” which rose “ to 41.3 per cent with the inclusion of state royalties”.

Background:

Miners not pulling their weight: Gillard
May 23, 2010 (AAP): The federal government has opened a new front of attack against miners in the fight over the proposed resource rent tax, saying multinationals such as BHP Billiton and Rio Tinto pay just 13% tax. Deputy Prime Minister Julia Gillard says the low effective company tax rate proves big mining companies can afford to pay more. "These are the cold, hard facts - the truth," she told the Nine Network. Domestic mining companies pay an effective company tax rate of just 17%, Ms Gillard said. "For the overseas companies, the multinationals, (it's) around 13%. "This is not a fair share and that's why we're moving to introduce the resources super-profits tax."

Swan defends super-profits tax
May 23, 2010 (AAP): Mining companies pay half as much company tax as those in the manufacturing and retail industries, Treasurer Wayne Swan says. The Rudd government stepped up its campaign against the big miners in the fight over Labor's proposed 40% resource super profits tax (RSPT). Mr Swan used independent analysis included in the Henry tax review to argue “ordinary workers” were getting ripped off by the likes of BHP Billiton and Rio Tinto. “In Australia, wholly-domestic mining companies paid an effective tax rate of only 17% and multinational mining companies paid an effective tax rate of only 13%,'' Mr Swan said in his latest economic note. Both (are) dramatically below the headline company tax rate of 30%.'' By contrast, domestic manufacturers paid 25 cents of company tax for each dollar earned, while local retailers paid 27 cents in the dollar, during the period 2003 to 2007.

Mining figures 'based on student's paper'
24 May 2010 (ABC News): Opposition finance spokesman Andrew Robb has accused the Government of a desperate attack against the mining industry by quoting figures from a student research paper to show how much tax the sector pays ... "They rely - in an attack on the icons of Australian industry, the reputation of Australia as an investing country - on a graduate's paper, which is a regression analysis," he said. "It is a ridiculous basis on which to mount an attack. It's just a working paper, it's not even a thesis or a peer-reviewed piece of work. It's the politics of desperation." Describing it as the "shonkiest piece of work" he had ever seen, Mr Robb says the paper does not take into account royalties and payroll tax, has combined Australian and New Zealand data and uses an inadequate sample. Mr Robb says the Treasurer should ask the Australian Tax Office for the figures. "[They should] pick up the phone and ask for a comprehensive assessment, not scramble around the world for a piece of paper which suits their argument," he said. "We're not dealing with some internal union dispute. This is Australia's reputation that is being treated as a pawn in Labor's political campaign."

US study widens the mining companies' credibility gap
24 May 2010 (Bernard Keane, Crikey): The study the federal government is citing in its counter-attack against the mining industry’s claims about the impact of the RSPT is a wide-ranging international study by one of America’s most prominent economic research establishments. And it demolishes the industry’s claims to already be paying high tax rates, instead showing that Australian mining companies are some of the lowest–taxed corporations in the world … The average effective tax rate of mining multinationals in Australia is 13%. How do we know? Last year two American tax economists, Douglas Shakelford and Kevin Markle, looked at effective tax rates faced by multinational and domestic companies around the world (the study is here, but you'll have to buy it) … Shakelford, who is Distinguished Professor of Taxation at the University of North Carolina and has worked on several similar studies over the past two decades. And a shock to the National Bureau of Economic Research, which published the paper. The NBER is pretty much the ne plus ultra of American economic research institutions. It’s the outfit that determines when the US enters and leaves recessions. The point of the study was to determine whether there was any truth to claims from progressive politicians that multinational companies enjoyed lower tax rates than domestic-only companies. Their conclusion was that multinationals faced pretty much the same effective tax rates as domestic companies. In demolishing the populist case for special taxation arrangements for multinational companies, Shakelford and Markle were hardly engaged in some left-wing frolic … It aggregated data from the tax paid by, and profits before tax of, companies across countries and industries. It then compared ETRs faced by multinationals and domestic companies in different industries in different countries. It found mining multinationals faced an ETR in Australia of 13%, the lowest rate of any country studied, lower than Europe (16%) or Canada (17%), which is apparently poised to use the RSPT to steal mining investment from us. And in fact this ETR rate was one of the lowest of ANY country for ANY industry (for the record, retailers face the highest ETRs in Australia, at 27%, and it's a worldwide phenomenon that retail pays high ETRs). It was also unusually and significantly lower than the ETR of our domestic miners, who on average pay 17%.

Mining companies lying or ignorant: Swan
25 Mat 2010 (Michelle Grattan, Ian Mcilwraith And Simon Mann, The Age): The Rudd government has rushed the release of a report by Treasury officials to back its claim that mining companies pay much less than average tax. The move came as Treasurer Wayne Swan took the attack on recalcitrant mining companies to new heights, warning shareholders to beware of ''lying'' or ''ignorant'' executives, and accusing some firms of manipulative behaviour … But Mr Swan's argument could come under fresh scrutiny after a United States researcher - whose work was cited by the government at the weekend to back its case that mining is lightly taxed - said people were ''over-reaching'' on his findings … Co-author Kevin Markle, a PhD student, cautioned that the paper had not yet been peer reviewed or published. "I think the bottom line is that it sounds like … people are over-reaching on what the paper purports to do," Mr Markle said. This was backed by economist Sinclair Davidson, of RMIT University, who has accused the government of quoting the research out of context. Writing for BusinessDay in The Age today, Professor Davidson says Australian Taxation Office statistics show mining companies paid tax at a rate of 27.81% in 2007-08. ''Through ignorance or indifference, the Rudd government is attempting to introduce a tax based on an argument that is demonstrably wrong,'' Professor Davidson writes.

Wayne Swan mining tax claims undermined
25 May 2010 (Matthew Franklin and Richard Gluyas, The Australian): … As the Treasurer implored the mining industry to drop its "rhetoric and threats" and negotiate with the government, his weekend claim that miners pay effective tax rates of between 13 and 17% was torpedoed by tax office figures produced by the opposition. The ATO data said miners paid an effective rate of 27.8%, which rose to 41.3% with the inclusion of state royalties.

This tax will kill Rudd
25 May 2010 (Andrew Bolt, Herald Sun blog): More trickery, says reader Victoria 3220: “Was Swan being incompetent or dishonest? The Treasurer of Australia used an old 2009 version of the draft paper that he and Gillard used to claim the mining industry paid only 17% tax … The 2010 version has dropped the 17% tax finding. The question is, did the Treasurer of Australia with the entire resources of the government behind him either so incompetent that he was unable to find the latest version of the draft report, or did he deliberately choose to mislead and deceive by using a version of a paper since amended by the authors?”

Mining tax research paper based on as few as four companies, admits researcher
25 May 2010 (Samantha Maiden, The Australian): The US academic whose tax research was cited by Wayne Swan and Julia Gillard to argue mining companies should pay more tax has conceded the figures could have been based on as few as four Australian companies. Kevin S. Markle, the PhD student at the centre of the storm has told The Australian that the size of the sample was why the figures were dumped from updated version. Fewer than twenty companies were used to establish the figure of a 17% ffective tax rate for Australian mining companies in the study. "Whoever chose to use that table as if it delivered some precise measurement on that was not the right thing to do,” Mr Markle, a co-author of the paper, told The Australian Online ... M Markle added that only examples of countries where more than 20 companies were cited were kept in the updated paper, and the Australian sample was not large enough.

Mining the figures uncovers deception
25 May 2010 (George Megalogenis, The Australian): The mining industry is by far the nation’s highest-taxed sector because it pays royalties. But it is one of the lowest-taxed for federal company tax, based on the industry’s own calculations. The effective company tax rate for miners is 27.81%, the 14th lowest out of 19 sectors. When royalties, which at present go to state governments, are taken into account, the industry moves to 41.34%, the highest for total tax. The Rudd government missed the political opportunity to make this point because it relied instead on old data from US researchers Kevin S. Markle and Douglas Shackelford, of the National Bureau of Economic Research, that is no longer applicable … The Australian has sifted through the data and the competing claims to find mining is paying a significantly lower rate of tax to Canberra than other sectors. However, the proposed resource super-profits tax will change that equation by applying a second tax at the federal end to replace the state-based royalties, which will be refunded out of the proceeds of the new tax. Using the figures the Minerals Council of Australia cites in its defence, mining is taxed less at a federal level than all but five sectors: accommodation and food; electricity, gas and water; agriculture; real estate; and financial services. The mining industry says its effective tax rate of 27.81% is higher than the all-industry average of 24.56%. But the average is dragged down by the 21.54%rate paid by financial services. Comparing apples with apples, mining pays 0.57 percentage points less than manufacturing and 0.63 points less than construction. The highest-taxed sector is public administration and safety, which is 1.84 points above mining at 29.65%. Royalties change the equation because they take the effective tax rate for federal and state taxes to 41.34%.

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