The Business Council of Australia finally managed to squeak something about the Rudd Government’s new mining tax yesterday, exactly a month after it was announced.
Why the BCA took so long to cough a mealy-mouthed statement about this disaster is a mystery, although it might have something to do with the fact that the Deputy Chairman of the BCA, Greig Gailey, is inside the tent – a member of the government’s five-person consultation panel.
It might also be that Australia’s top chief executives are frightened of a government that seems to be capable of almost anything, and just want to keep their heads down.
But the leaders of our most important industry are in complete uproar and have been for a month. They stand accused of lying and profiteering by the Prime Minister and Treasurer, and are promising to cancel billions in new projects, thus affecting every member of the BCA. Yet the main complaint of the nation’s peak business group’s is that the RSPT is not the “root and branch” tax reform that was promised, and that the BCA jolly well asked for in March.
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Yesterday’s statement from the BCA added that the RSPT contradicts one of the BCA’s ‘high-level’ principles of tax reform: that any change should be prospective, not retrospective. It’s also worried about the ‘perception’ of increased sovereign risk. That’s it.
The fact that the RSPT applies to existing projects – the one element of the tax that the BCA chose to highlight – is actually the least of its problems for Australia.
If the tax applied only to future projects it would arguably be much worse because, as things stand, new developments are being cancelled and Australia’s future prosperity jeopardised, but at least there’s $9 billion in extra revenue to finance some infrastructure and a lowering of the company tax rate to 28 per cent.
An RSPT in its present form that only applied to future mines would potentially not raise a single dollar, because there wouldn’t be any future mines.
The worst thing about the RSPT was spelt out by KPMG in its report for the Minerals Council of Australia and released two days ago: the tax completely destroys the viability of new of nickel, gold and copper mines, and ruins it for iron ore and coal.
According to KPMG’s modelling, the application of the RSPT results in negative net present values for nickel, copper and gold mines, and it reduces the NPV for iron ore and coal projects by 46 per cent and 57 per cent respectively.
Another big accounting firm, Deloittes, has gone through ATO data and demonstrated that the effective tax rate for Australian mining companies (company tax plus royalties) is 41.3 per cent, compared with the average across all sectors of 27.18 per cent. I went into the ATO website and did the same calculation: it’s true.
In one of its taxpayer-funded advertisements, the government says: “Before the last boom Australia got 1 in every 3 dollars of mining profits in royalties and resource charges, we now receive just 1 in every 7 dollars.”
This statement is a disgrace, even leaving aside the fact that we are paying for it. Of course royalties have fallen as a percentage of profits as mines have grown in scale and efficiency – that’s why you have corporate income tax as well.
At 41.3 per cent, Australia’s effective tax rate is roughly average among global mining tax regimes – a bit more than most, but less than some. According to KPMG’s modelling the new average effective tax rate with the RSPT rises to 56.9 per cent for iron ore and above 50 per cent for all other minerals – clearly the highest in every case.
The government has explicitly acknowledged the need for competitive tax rates in reducing the overall company tax rate from 30 per cent to 28 per cent, but apparently this does not apply to mining – the industry on which much of our future prosperity will be based.
There are three parts to this disaster:
1. The fact that it would raise the effective tax rate to the world’s highest for mining projects and therefore curtail new development;
2. The way it was introduced with no consultation or warning, which has separately damaged Australia’s reputation among all global financiers as a stable, sensible place to do business;
3. And the way the government now seems to think it’s in a political battle with global mining leaders – a battle it can win through advertising spin and lies, as it usually does against political opponents. But these are people who make decisions based on arithmetic and risk, not emotion or public opinion.
As the managing director of Xstrata, Mick Davis, wrote in a letter to London’s Financial Times this morning (and it’s worth quoting at length):
“Australia’s reputation as a stable regime for foreign investment has already been damaged and investments in Australian resources are at risk of being delayed or cancelled. The consequences will be borne by mining communities, prospective employees, superannuation funds, customers, service providers and suppliers, impacting on Australia’s prosperity, particularly in resource-rich remote or rural locations.
“Resources are immovable but diversified mining companies have a choice of countries in which to invest. The government has shown itself willing to breach investors’ trust and damage the economic case on which multi-billion dollar investments were made. 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.
“The mooted risk of other countries following suit is largely overdone. No other country is considering imposing such a punitive tax on its mining industry. Australia’s resource taxation will be isolated as the highest in the world at 57 per cent. Indeed, many resource-rich nations regard this tax as an opportunity to gain a larger share of global mining investment – unfortunately for Australia, it is.”
It is a huge miscalculation to think this letter and other similar statements by mining leaders are part of a “scare campaign” as Wayne Swan claimed this week.
This article first appeared on Business Spectator.