Time to get the mining tax right
Mining companies have it good in Australia - perhaps too good. Photo: Reuters
AT THE height of the mining super profits tax debate we heard much about the danger that mining companies would go elsewhere if they did not get a satisfactory outcome in their talks with the government.
Recent developments overseas and history in general shows why such threats have to be taken with a large grain of salt.
While there can be much argy-bargy in policy development, Australia is a politically stable country providing a relatively secure environment for investors. The super profits tax aimed to ensure that mining companies would take home above-average returns. Nevertheless, they campaigned against it and negotiated to get the mining resources rent tax, which the big miners believed would give them an even better deal.
There is no question that such taxes reduce mining companies' overall rate of return. There is also no question that the companies make huge investments to get their projects up and running and expect better than average rates of returns in order to do so.
It is also true that the rich deposits of ore are found in specific locations. The companies cannot shift their production around like a clothing manufacturer can shift a factory.
During the debate it was implied there were many equally attractive deposits around the world that could be mined. Governments in these countries would not impose these annoying taxes.
Well, one of our big foreign miners, Rio Tinto, has found out just how true that is in recent years. Take its $4 billion investment in Mozambique, for example. There the company planned to dredge the Zambezi River to carry coal 400 kilometres from its mine to a new port to be constructed at Quelimane on the coast. But late last year the dredging agreement Rio thought would be forthcoming fell through, and the Mozambique investment is now a liability in the company's books.
And that's not all. In Mongolia earlier this year, the government suspended licences for a key portion of Rio's Oyu Tolgoi copper-goldmine, amid a dispute over costs, revenues and (would you believe it) taxes.
Such clashes are not new. The Rio subsidiary CRA closed the Bougainville copper and goldmine in 1989 as a result of fierce local opposition.
BHP has also had its share of problems in Papua New Guinea. In 2002, it transferred its 52 per cent stake in the Ok Tedi mine to the Papua New Guinea Sustainable Development Program after much criticism of the environmental damage caused by the project.
All mining companies must deal with the same issues around the world - quality of deposit, method of extraction, transport and infrastructure, environmental damage and regulations, labour costs and government taxes and charges. In some places, it might be possible to pay off senior government people to get a good deal in relation to environmental regulations, or government taxes and charges but such corrupt practices can and do backfire. Corrupt governments can be thrown out of office and who is to say what deal the new regime will impose? Local people, like those in Bougainville who feel they have not had a fair deal, may succeed in shutting down a project.
Mining companies have it good in Australia - perhaps too good. Not only are they protected by the rule of law, they are able to use their money to influence the political scene. It is regrettable that so many voters swallowed the line against the super profits tax pushed by the miners in their newspaper, radio and television advertising campaign. It is even more regrettable that the Coalition went in to bat for the miners. Labor failed miserably in its attempts to counter the campaign, which should have been seen by voters for what it was - a self-interested, greedy grab for excessive profits.
The Greens now have a bill before the house and the Senate aimed at closing the tax's loopholes, including the depreciation fiddle which will cost taxpayers billions in lost revenue in coming years. Work conducted by the Parliamentary Budget Office for the Greens suggests that closing the depreciation loophole, which allows the big miners to deduct the market value of existing assets over many years, instead of deducting the book value over five years, could raise an additional $4 billion to 2016-17.
Unfortunately, the Coalition is proposing to throw out the tax, should it win government. Labor has so far refused to support the Greens' bills, probably because it does not want to admit it got it wrong and have the embarrassment of having to further modify its second-edition tax and negotiate again with the mining companies.
The companies have already indicated that in this election year, they will, if pushed, be campaigning, not negotiating.
Labor remains hopeful that with the iron ore price recovery late last year, revenue from the tax in the full financial year will be significantly more than double the half-yearly revenue of $126 million. Even if that is so, it will still not bring in enough to cover the budgeted expenditure Labor committed to when it believed the tax would generate $3 billion for this financial year.
A Senate inquiry is now taking submissions on the design of the tax and hearings are scheduled to get under way next month. Prime Minister Julia Gillard and Treasurer Wayne Swan should swallow their pride and accept that modification of the tax is necessary. They have nothing to lose by campaigning on the basis that, should they be re-elected, they will change the tax to tackle the loopholes the Senate inquiry exposes.
The mining tax is not a clear vote winner for the Coalition. A sum of, say, $500 million from the tax for the financial year is not to be sniffed at. The Coalition has a major shortfall in its budget and surely will not be allowed to run through the election campaign promising to retain virtually every government expenditure program at the same time promising to abolish the carbon and mining taxes.