The Australian government is planning to introduce a 40% tax on profits of natural resource extraction in the Antipodean state. Taking effect from 1st July 2012, the tax will apply after allowing for extraction costs and recouping capital investment. Companies will also not pay the Resource Super Profits Tax until after they provide shareholders with a return on capital investments and state royalties will be refunded to companies under the scheme.
Currently, the system of state royalties taxes production rather than profits. The Australian government says that this does not account for some mining projects which have longer lead times on return, and others which provide a relatively straightforward extraction process. They say that the new system will be fairer for both companies and Australian citizens.
Mining companies, however, have responded vociferously against the proposed RSPT. On Thursday 27th May 2010, the CEO of Cliff Natural Resources (NYSE: CLF) (Paris: CLF), Joseph Carrabba, wrote to shareholders to ask for help in swaying politicians away from the RSPT:
…We directly employ approximately 150 salaried employees and over 500 employees indirectly through our contract mining relationships. In 2009, this segment generated U.S. $542 million, or approximately 23%, or our Company’s total annual revenues of U.S. $2.3 billion.
All of this would be adversely impacted by an additional and unjustified tax burden. As written, the Government’s proposal could result in the total effective tax burden on Cliffs’ Australian profits increasing to approximately 60% from a current rate of approximately 39%. This would make the Australian resources industry the highest taxed in the world….
…We urge you help educate the political leaders there as to the real impact of this new, major and unwarranted tax imposition.
In the letter, Carrabba also claims that future investment in mining projects would be threatened by the tax.
In defence of the new tax, the government says that tax revenues have decreased in relation to booming profits in the natural resources sector. It claims that the government is simply claiming a “fairer share” for hard working Australians.
Something which may concern observers is the chance that companies may take their taxes elsewhere. Companies have been reassuring investors worried about the impact on profits.
On 5th May 2010, Dragon Mining (ASX:DRA) issued an announcement that the super tax would not impact on the company as it is listed in Sweden and Finland which have no mining royalties and corporate tax rates are 26.3% in Sweden and 26% in Finland. Dragon Mining is currently considering the feasibility of a prospective mine in the Murchison District 65 kilometres north-northwest of Cue, approximately 750 kilometres North-East of Perth in Western Australia. The Weld Range Metals Project would produce chrome, iron and nickel at a vertically integrated site.
Ministers have been negotiating directly with the mining industry over the implementation of the tax. On Tuesday 1st June 2010, Kevin Rudd spoke to the media at a press conference, saying:
“…consultations are going well, second, we do not expect to land any agreement with the mining industry any time soon. Anyone out there expecting that there’ll be some magic deal at midnight tomorrow night is wrong. That’s not how it’s going to be. Furthermore, this is going to be quite a long and protracted negotiation over quite a long period of time. And there I speak of weeks, at least, if not beyond.
The Government of course, is sitting down with companies from right across the mining industry and will continue to do so because we believe it is right that we understand fully the implications of the Government’s proposed tax on the individual circumstances of each company.
Furthermore, I wish to emphasise that the Government remains fully committed to a Resource Super Profits Tax consistent with the framework that we announced on 2 May. That of course, includes a 40 percent rate, that, of course, includes making sure that we can also bring about other elements of tax reform as well.”
Much had been made about the TV advertising run by both the mining industry and the government against and for the tax, respectively. Mr Rudd spoke of $100 million being spent by the mining sector on anti-RPST ads, and defended his use of taxpayers’ money to run counter advertising in favour of the Resource Profits Super Tax.
During the conference, the Prime Minister, Treasurer and Minister for Resources, Energy and Tourism all reiterated their commitment to the RSPT, explaining that current negotiations were about transition and timing only, and that “the Government is entirely prepared for the sorts of scare campaigns that we’ve seen in times past” promising to not be railroaded into a different timetable. Whether the mining sector manages to secure concessions during the consultation period remains to be seen.