Trials of taxing a passing phase
Photo: Rob Homer
TO FORECAST revenue from the Mining Resource Rent Tax (MRRT), start by sacrificing a goat and scattering its entrails, Deloitte Access Economics suggested in November 2011.
The independent advisory agency then went on to estimate that total revenue from the government's resource rent taxes would be $7.7 billion in 2012-13.
This was only $290 million short of the Treasury's estimate for the Petroleum Resource Rent Tax (PRRT) and MRRT, with the net revenue from the MRRT alone estimated in the 2012 budget to be $3 billion this financial year.
But, by last month, the speculation was that, because of low commodity prices, the MRRT had generated no revenue at all in the first quarter of the year. In a news conference just before Christmas, Treasurer Wayne Swan would concede only there was no doubt that PRRT and MRRT revenue would be "down substantially".
We are now deep in the 2013-14 budget preparation process and Treasury officials are working feverishly to forecast, among other things, coal and iron ore prices for the coming year, to enable them to calculate the MRRT revenue. In truth no one has a clue what the prices will be a year from now and their estimates will be guesses.
In recent months, iron ore prices have recovered much of their first-quarter drop and are now above $US150 a tonne, a marked improvement from last September when they were down at $US86. But they are not expected to return to the peaks of $US190 of two years ago.
Coal prices remain depressed. The latest forecast from the Bureau of Resources and Energy Economics is for a substantial increase in the volume of these exports, but a fall in total value.
The poor first-quarter prices, and the suggestion that the MRRT generated no revenue in the quarter, led the media and opposition to speculate that the tax would be a white elephant. But it's far too early to say.
If, as the government and Treasury argue, we are still in the investment phase of the mining boom and the strong rise in export volumes is yet to come, there is much potential revenue to be generated from the MRRT. In the investment phase mining companies' MRRT payments are low because the companies can deduct their capital expenditure. But when construction is finished, they have only operating costs and the government's hope is that the companies will then generate nice juicy MRRT-taxable profits.
The worry is that mining development has been worldwide, in keeping with the sector's notorious habit of overshooting the mark and turning booms into busts.
This may already have happened in coal. In 2011 Indonesia overtook Australia as the world's largest coal exporter. Low gas prices, resulting from the US shale gas revolution, have brought a marked decrease in US coal use, leading thermal coal producers to seek other markets and contributing to an oversupply in Europe.
In Australia the coal industry has lost 8000 jobs, 15 per cent of its workforce, in the past six months. Some Queensland mines, flooded in January last year, are still under water and awaiting permission to pump pits.
All this makes it unlikely that the federal government will get much revenue this year from the coal side of the profits-based MRRT. Given this, the industry must surely be regretting the fact that it did not get more strongly behind the federal government's move to have a resources rent tax replace state royalties, which are levied on production. Coal royalty payments for 2012-13 totalled $4.2 billion, Queensland contributing $2.2 billion.
While there has been considerable debate about "selling off the farm" to foreigners, there is much less about foreign ownership of the mining industry.
The Big Australian, BHP Billiton - our largest metallurgical coal producer and second biggest thermal coal exporter - is of course no such thing. It is about 76 per cent foreign owned. Our biggest thermal coal producers, Xstrata, is 100 per cent foreign owned, as is Peabody, our third biggest. In metallurgical coal production, BHP and Xstrata are joined by Anglo American, which is 100 per cent foreign owned.
In addition, in recent years we have seen a host of smaller Australian miners taken over by foreign companies. A day after the Gillard government released its Asian century white paper, it emerged that thermal coal explorer Endocoal would be taken over by Chinese-backed U&D Mining Industry Australia. There is also speculation that Nathan Tinkler's Whitehaven Coal is in take-over talks with China's Shenhua Group. Yancoal, a subsidiary of China's Yanzhou Coal, already operates mines in three states.
And it's not just the Chinese who are here. The Indians, Brazilians, Japanese and Americans have their cut. Gujarat NRE Coking Coal owns hard coking coal mines in the NSW southern coal fields. Brazilian company Vale Australia, has interests in five mines. American Peabody Energy and ArcelorMittal took over Macarthur Coal in 2011 and the Japanese Mitsubishi Development has a joint venture stake with BHP Billiton in Australia's largest coal producer and exporter, BMA.
The Greens are probably right in their estimate that 90 per cent of thermal coal production and 85 per cent of coking coal production is in foreign hands.
For Australia, the major worry is the potential for tax avoidance through low transfer prices. Gujarat NRE Coking Coal, for example, sells most of its production to its Indian parent company. Management predictably says that its transactions are at arm's length.
The challenge for the Australian Tax Office is to ensure that this is so.