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Issue #1541      28 March 2012

Government’s mining tax capitulation

The Gillard government finally got its minerals resource rent tax (MRRT) through Parliament last week. The legislation was passed with the support of the Australian Greens on the basis that “something is better than nothing”. The ferocious battle waged by the mining industry against the original resources super profits tax (RSPT) resulted in a substantially watered down and highly complex replacement. The Gillard government effectively capitulated to the Big Three mining corporations – BHP Billiton, Rio Tinto and Xtrata.

The Big Three had enjoyed an extremely cosy relationship with the Rudd government, in particular with its resources minister Martin Ferguson. They were stunned and angry when suddenly faced with the Rudd government’s support of a super profits tax on their takings as recommended in the Henry tax review in 2010. How dare a government attempt to take a greater share in the fruits of their unfettered plunder of Australia’s resources, and not even ask them first!

BHP was at the forefront of the attack on the RSPT. The global mining giant threatened, amongst other things, to cancel a $21 billion expansion of its Olympic Dam mine. The expansion includes increasing the output of uranium oxide from 4,500 tonnes per annum to 19,000 per annum. Unfortunately, the mine, not BHP’s threat, is going ahead.

Multi-billionaire Clive Palmer joined fellow mining magnates Gina Rinehart (beneficiary of Lang Hancock’s inheritance) and Andrew Forrest of Fortescue Metals in an all out offensive to unseat the Labor government and install Tony Abbott. Palmer launched a vitriolic attack on Treasurer Wayne Swan, calling him “an intellectual pigmy” in response to an essay by Swan in The Monthly magazine, in which he said, “A handful of vested interests that have pocketed a disproportionate share of the nation’s economic success now feel they have a right to shape Australia’s future to satisfy their own self-interest.”

The Minerals Council of Australia (MCA) had a war chest of $100 million to fight Labor’s new tax. They launched a massive advertising campaign claiming the tax would make mining unprofitable and ruin the Australian economy. Nothing could have been further from the truth.

The mining corporations are raking in obscene, record profits. According to Bureau of Resources and Energy Economics forecasts coal exports are set to increase by 70 percent and iron ore to almost double over the next five years.

There is no end to their drive for larger profits and accumulation of wealth. Rinehart, for example, is currently raking in $140 a tonne for coal with production costs including labour of $40 a tonne. She wants to import Section 456 visa workers for $3 an hour. Rinehart, Palmer and Forrest have no intention of paying a single cent more in taxation. They are still out to bring down the government and have the tax either thrown out by an Abbott government or through a constitutional challenge to the MRRT in the High Court.

Not that they actually pay much tax. Swan put that claim to rest, noting that “wholly-domestic mining companies paid an effective tax rate of only 17 percent and multinational mining companies paid an effective tax rate of only 13 percent – both dramatically below the headline company tax rate of 30 percent.”

The mining corporations receive $2 billion per annum in a diesel fuel rebate, which will continue to rise with the opening of more mines. (The rebate is 38.143 cents for every litre, argued as necessary because of their high volume usage!)

The Communist Party of Australia and the Greens have long been calling for the abolition of this outrageous subsidy. It does nothing to discourage the use of fossil fuels in an industry that is already a major generator of greenhouse gas emissions.

Richest mine exempted

The original RSPT was based on a super profits tax of 40 percent on profits producing a return above the official bond rate. It basically covered the resources sector, with the exception of liquid petroleum products which are subjected to a 40 percent tax. The government had also agreed to refund royalties paid by mining corporations to state governments.

The MRRT only covers iron ore and coal. Gold, silver, uranium, nickel, tin, etc are all exempt. BHP’s Olympic Dam project holds the world’s largest known uranium reserves, fourth largest known copper, fifth largest gold as well as huge reserves in silver and diamonds. Their super profits from these reserves are exempted from the new tax – even though, as the government pointed out, they belong to the people of Australia. And the public will be further fleeced with millions more in the diesel fuel rebate.

“The owners of this massive hole, BHP Billiton, are smiling all the way to the bank. Their deal with the South Australian government locks in pitifully low royalty rates for 45 years, with no guarantees of one extra job in the state, and the government footing the bill for infrastructure. And Australians will not receive a cent from the mine under the MRRT,” Greens Senator Penny Wright said.

“The net economic return to South Australia in the years 10-20 of the project could be as low as $10 million per year and that is even before millions are given back to BHP Billiton through federal subsidies like the diesel fuel rebate.”

Watered down beyond recognition

The MRRT only applies to companies with coal and iron ore profits of more than $50 million, and is phased in up to the full rate at $100 million net profit. As a result of the changes the number of companies likely to pay the tax is estimated at around 320.

It is set at an effective rate of 22.5 percent (just over half the original 40 percent) and introduces new measures for calculating profits and assets, depreciating assets, for transferring losses, and a range of allowances that can be used to reduce “net profits” and tax liabilities.

These allowances include credits for the payment of state royalties, which in effect reduce the tax liability by the amount of royalties paid.

Profit is not based on the company’s overall profits. It involves quite complex calculations. Companies must calculate the profit made up to the point of extraction of the coal or iron ore. This calculation does not include profits attributable to value added through such processes as washing, crushing, sorting, separating or refining of the coal or iron ore following extraction.

This opens up no end of opportunities for cooking the books by such means as transfer pricing to determine the value that was added following extraction. The accountants will have a field day calculating the relevant profits for each separate project, which are then added together for the company as a whole.

Companies will be able to immediately write-off exploration costs and all new investment and deduct expenses for projects in calculating net profit. No MRRT will be payable until the project has made enough profit to pay off its upfront investments.

“If losses and royalty credits cannot be used within an MRRT year, they are transferred where possible, or carried forward to later years with the relevant uplift rate applied.” (Explanatory memorandum to the bill, 1.30) “Transferred” refers to another project that is profitable.

In other words, if one project is making a profit, the costs of a new project (investments, exploration, etc) can be deducted from the profits of a different project. Any company carrying out exploration and opening up new projects on an ongoing basis could avoid payment of the tax for years to come.

The “uplift rate” is a form of indexing the loss, an annual increase in the amount of loss based on “an interest rate” that ostensibly “preserves the real value” (as against nominal dollar amount) over the years until it has been used up. It is calculated as the bond rate plus seven percent.

The mining companies couldn’t have asked for a more generous (for them) scheme, apart from its total abolition which Gillard was not prepared to accept.

How spent

The government said the income from the MRRT will be used:

  • to increase government superannuation contributions to low-income-earners
  • for investment in roads, bridges and other infrastructure to assist the mining sector
  • to fund the next round of company tax cuts – one percent – as compensation for the increase in superannuation payments which are being raised from nine percent to 12 percent over six years from 2013-14 to 2019-20. (Workers are now being asked to pay for the increase – see Editorial)

It will be lucky if it sees enough to fund one of these.

Public resources, private profits

In his Second Reading speech to the MRRT bill, minister for financial services and superannuation, Bill Shorten, told Parliament that “current arrangements fail to provide an appropriate return for these non-renewable resources to the Australian community, who own the resources 100 percent”.

He is correct, but the new tax will not provide an appropriate return.

The only way that the people of Australia can really gain their share of the wealth that the minister correctly points out belongs to them, is for the mining companies to be nationalised. Public ownership would see all profits returned to the public purse – adding hundreds of billions annually to provide quality public health, education, housing, transport, renewable energy, infrastructure, etc. It also could be used to fund social projects, including higher unemployment benefits and pensions.

At the same time the original owners of this wealth should not be forgotten; a percentage of all mining taxes and royalties should be directed to the social and economic needs of Indigenous Australians.

Public ownership and control could also result in better and safer working conditions, trade union negotiated agreements and the necessary community infrastructure for mining towns.

The Gillard government accepted the dropping of the term “super profits” – a concept which should be restored and its use widened and applied to all industries. There is no excuse for limiting the tax to coal and iron ore.

Finally, the government should not be reducing corporate taxation. These tax cuts are being funded by the poorest and most disadvantaged in the community who bear the weight of budget cuts.  

Next article – Editorial – Double dipping bosses

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