It is only a matter of time before the miners start lamenting that they did not seriously negotiate with Kevin Rudd over his Resources Super Profits Tax (RSPT).
The mining industry has always favoured rent/profit taxes instead of royalties. What the mining industry really disagreed with was the rate of the Resources Super Profits Tax.
The GST Distribution Review Report of October 2012 said the following.
“Well designed rent-based taxes are likely to be more economically efficient than royalties, particularly in periods of low commodity prices or high costs. . .Other factors, such as the size, variability and timing of the return received by government, as well as administration and compliance costs, are also important considerations when choosing between alternative resource charging regimes. .. The commonwealth’s design of the Mineral Resources Rent Tax [MRRT] and the Petroleum Resources Rent Tax [PRRT] has created an opportunity for states to seek to increase their revenues at the expense of the commonwealth – an undesirable and unsustainable situation, which needs to be resolved.”
Consider the ways that the mining industry now faces problems because of its failure to embrace the RSPT.
- As the world economy and particularly China slows, export prices for Australian minerals are falling. The GST Review report mentioned above notes that since May 2012 “the spot prices for iron ore and … coal have fallen between 15% and 33%.” This trend has continued. There will be an increase in the production volume because of the increased capacity that the miners have installed. Because of this the miners are caught in a double whammy- export prices are falling which which will reduce income, but through an increased volume and value of sales there will be increases in royalties.
- With the states squeezed for revenue, they will look increasingly to mining royalties to help their budgets. These increases in royalties are well under way. The royalty take of the states has increased five-fold from about $2 billion p.a. in the early 2000s. These royalty increases are likely to continue.
- A lot of the recent high profits of the mining companies have ended up in dubious investments that are now being written off. Rio Tinto alone has written off $US35 billion since 2007 with more to come. BHP has also written off substantial investments. The high profits of the miners that were not effectively taxed also resulted in wage and cost blow outs that the miners will now have to wind back. Many of the large resource projects are de unionized. Yet that is where the big wages/cost blowouts have occurred. Managers must bear the responsibility. If they had been paying a super profits tax in the boom years, they may have been much more prudent. Some must have thought they were dealing in monopoly money.
- An important part of the Henry RSPT package was that in return for the super profits tax on miners in boom times, there would be a reduction in the company tax rate to 25%. All businesses, including the miners, have missed out on this and continue to pay at the rate of 30%.
The miner’s “victory” is likely to prove pyrrhic. At some point, they will have to return to the table and negotiate tax changes. Hopefully the federal government will handle it much better next time. All the key players will need to be involved.
- The commonwealth government, which has a pre-eminent role in revenue raising on behalf of the community.
- The state governments who depend heavily on mining royalties.
- The mining industry that supplies the capital and expertise, and
- The community which is the owner of the minerals and has a legitimate interest in ensuring that the whole community benefits over the long term from the extraction of its resources.
A recent Deloittes-Access report to the Mining Council of Australia which can be found online pointed out that because of falling commodity prices the mining sector would have done better under Kevin Rudd’s RSPT than under the present bowdlerised tax, the MRRT. The report said
“Our analysis finds that the first two quarters of 2012-13 were indeed ‘bad times’. A slow-down in China hit commodity prices for six. That’s why the MRRT raised only $126 million over this period. However, had the RSPT been in operation, we estimate it would have generated negative net revenue of the order of $0.9 billion.”
The miners seem to have already kicked an ‘own goal’. In the period mentioned by Deloittes they would have been better off under Kevin Rudd’s Resources Super Profits Tax.
If commodity prices keep falling and the ineffient state royalties keep rising the miners may need to start praying for the Resource Super Profits Tax. What a tasty dish!