Andrew Forrest, the non-executive chairman of Fortescue Metals group, waves a flag during the inauguration of one of the company's trains | Courtesy of Fortescue Metals
The Australian mining tax, scheduled to take effect on July 1, “raises the bar” on taxes applied to mining projects internationally, according to Edward Heakes, a Toronto-based partner and taxation expert at Norton Rose Group.
“It’s hard to make apples to apples comparisons, because every jurisdiction imposes the tax in a slightly different way,” he said. But, according to Heakes, the tax puts Australia “out on the forefront” because, at the end of the day, it boosts the government’s take compared to other major mining jurisdictions, such as Canada and Chile.
The Mineral Resource Rent Tax amounts to 30 per cent of the profits from Australia’s two biggest exports, coal and iron ore, though the real rate falls to 22.5 per cent after a so-called “extraction allowance” is applied. Combined with income taxes, mining companies will be paying an effective tax rate of 42.3 per cent compared to an international average of 38 per cent. Miners with a profit of less than AUD$75 million will be exempt, and companies with Greenfield exploration projects will be able to carry forward expenditures until project revenues exceed those of expenditures.
The revenue grab is symptomatic of a wave of resource nationalism that is sweeping the globe from Ecuador to Indonesia as governments seek a larger share of the profits producers are enjoying as a result of rising commodity prices. South Africa may even leapfrog over Australia if a proposal to impose a 50 per cent tax on mine profits in that country is accepted.
Although the tax introduced by Australian Labour Prime Minister Julia Gillard is expected to add an estimated US$11.1 billion to government coffers over three years, it is not as extreme as the “super profits” tax proposed by her predecessor, Kevin Rudd. That tax was significantly higher at 40 per cent, applied to all mining commodities, and led to Rudd’s downfall and Gillard’s win. “In effect, instead of the tax applying to 2,500 projects, it will just apply to the 300 to 350 that would have represented the majority of the collection anyway,” explained Philip Bisset, tax partner at Clayton Utz, a law firm that operates out of Perth and Brisbane.
Another major amendment is miners can elect to use the market value of their existing mining facilities and equipment to offset the tax, whereas the previous tax put mature mining operations at a disadvantage because it was based on the amortization of those assets over time. That amendment, as well as a restriction that prevents miners from deducting the interest expenses on mine financing, now swings the pendulum too far in favour of larger companies, argue some of the smaller and less mature miners.
Most outspoken has been iron ore producer Fortescue Metals, which has said it will launch a High Court challenge of the tax. Fortescue claims the tax was negotiated behind closed doors with the countries’ three major miners, BHP Billiton, Rio Tinto and Xstrata, to minimize their tax liabilities. Fortescue chairman Andrew Forrest has gone so far as to say that Gillard agreed – behind Rudd’s back – to reform the super profits tax in exchange for a halt to a damaging anti-Labour advertising campaign led by the big three.
“The Mineral Resource Rent Tax will ensure the world’s biggest miners have an unfair advantage in the marketplace by reducing their overall unit cost compared to the smaller miners,” states Fortescue on its web site. “It will reduce investment in Australia, measurably and instantly for early stage iron ore and coal projects, as investors are encouraged to invest in projects and employment opportunities away from Australia.”
But Heakes pointed out that exemption for profits up to AUD$75 million is a major benefit for smaller companies, more in line with the Canadian approach, which leans towards preferential tax measures for smaller businesses. And because the new tax has “some real complexities” associated with implementation, the impact on individual projects remains to seen.
“[The tax] is going to be a factor that is costed in to determining where companies locate their resources,” said Bisset. “But there is still debate around the extent that the market value election for mature mining projects may shelter some projects in the early years.” That debate may be moot if the opposition Conservative party, which has vowed to scrap the tax, wins the next federal election in November 2013.