Chavez - in Australia?

[Dinner]

I'd like to add that big tax increases (if not off set by loopholes, tax credits, work arounds, or other such things) generally will lower investment on mining activities unless demand for those minerals is so high and alternatives so short that people have no option but to pay. Generally, I'd be more in favor of intelligently designed royalty agreements where the amount of royalty due to the state per unit output varies according to the market price of the mineral in question. That way the mines stay profitable (and people employed) no matter if the price of the commodity goes up or down but if the price goes up then so does the amount of the state makes off of these sales.

This has become very common in oil royalty contracts but I haven't heard of such complex royalty agreements in other materials mainly because they're much more common on Earth (iron, tin, etc...). The big problem with saying we're just going to tax you X% depending on your profits is it undermines the incentives companies have to become more efficient producers while a sliding royalty rate agreement (pegged to market prices) insures the state makes more if the commodity in question's price goes up (and less if the price goes down) but the company still has an incentive to be as efficient as possible because increased efficiency still means higher profits.

[Zevico]

Edit:

There's a fact sheet from the Aust Gov explaining how the tax works. Haven't looked at in full yet, but for those interested:

http://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdf

Key points-
(1) this tax is optional, in that a company may choose to continue to pay royalties to the States [in more or less the way Oerdin outlined above except they go to the Australian States]
(2) if companies choose to pay the tax, they will still pay royalties to the States but will compensated for tax paid, by the Commonwealth (federal government).

[Dinner]

I'm not sure why anyone would pay this tax then unless the proposed royalty rates are so high as to insure unprofitability no matter what the market conditions are. Why even add such a second layer of complexity? If the idea is to insure the state gets its "fair share" for the exploitation of minerals on its land, which is the goal I assume, then what good is there adding this proposed 70% tax? The said "fair share" could be much better modeled by sliding rate royalty payments the company owes to the state while the proposed tax would add virtually nothing (unless the proposed royalty rates exceed 70% which is preposterous for all but the rarest of rare commodities).

If the commodity is so rare as to constitute a virtual monopoly, and I believe no such commodity is produced in Australia, then I could see the sense of a murderously high tax rate as no one would have an effective alternative but if we're talking about iron ore, or tin, or aluminum, or just about anything else then this would just be a tax on profits and that is something which should be avoided. The reason is if the company becomes world class and the most efficient producer in the world, as should be every company's goal, then it would actually make less money then if it was a mediocre producer who produced less profits. If you're capping the efficiency of you're companies then you're capping how competitive they are in the market place and you'll end up with lots of companies going out of business. That can hardly be a good thing. It's much better to have variable royalty rates which encourage greater efficiency (and thus market viability) so that producers stay in business, people stay employed, and the state keeps getting those all important royalty checks which help fund things citizens want.

[trev]

this tax is optional

Generally wrong. There is currently a excise tax on crude oil production and derivatives. It will be optional for petroleum based activites to move from the old system of excise taxes to the new super tax. For all other resource projects there is no special taxing system at the Federal level and they will be forced into the new super tax.

The said "fair share" could be much better modeled by sliding rate royalty payments the company owes to the state

I am not sure about the constitutionality of such a system, there are definite limits on the sort of taxes states can impose in Australia and changing an existing tax to a new form may risk a constitutional challenge. States have had taxes rejected by high court challenges in the past. But it is a good idea. Federally any tax imposed must be the same across the board ( ie cannot take into account circumstances of individual mines and their costs of production), so royalty based systems with different rates depending on mine costs is not possible, which is why the gov't has gone for a share of mine profit.
Our constitution does limit to some extent types of taxation able to be charged by different levels of government.

[Dinner]

If something is really in such short supply and so precious to justify a 70% tax on profits (especially in a world market where capital can easily go to where ever the return is highest) then possibly a better alternative to a 70% tax might be to have a government owned producer but that path is fraught with peril. The upside is that the state gets 100% of the profits and I do believe that a well run state industry can be just as efficient as a private producer but the odds are stacked against them. The down side is the politicians now get to weight in on how the company is run (and almost always they have an interest in doing something other then being the most efficient producer possible especially if that means laying off potential voters), the government will often try to strip profits to be used for some other purpose (a more politically popular purpose) even though the business badly needs to reinvest those profits to maintain or improve production, and lastly having government run industries means there is more opportunity for corruption by politicians or bureaucrats. Never the less if the mineral in question is of such high value (market value or strategic value) or if it is in such short supply then it can be extremely profitable (much more so then simply taxing private companies) to let the state owned company do the job.

Examples of this are national oil companies such as Saudi Arabia's Saudi Aramco, Venezuela's Petroleos de Venezuela, Mexico's PetroMex, or Brazil's PetroBas. All of these are successful but also fall into the various downsides listed especially political interference with operations and profits being syphoned off for political reasons. That said all are immensely profitable and companies like PetroMex supply something like 2/3rds of the money used for Mexico's national budget. The last major downside to such monopolies is long term in that they discourage private parties from seeking out other potential fields because why spend the time, money, and effort if the state will just claim ownership? That means long term lots of potentially economically viable plays will not get exploited because not as many people are looking for them but on the upside 100% of the profits get realized by the state which can be a massive windfall.

[trev]

There has been close to 100% rises in contract prices for iron ore and coal recently, the government is trying to cash in on that and any other resource that has similar huge rises in the future. Personally I cannot see prices remaining at those levels in the long term, there are plenty of places around the world where miones can be developed for those resources. Just takes up to 5 years to get massive operations underway to supply the demand.

[Dinner]

Those rises won't last. There are simply way, way, way to many potential iron or coal mines in the world. Hell, the world has spent three decades closing iron and coal mines due to over production and in just a few years you're going to see tons of new producers on the scene. Countries across Europe and the Americas closed tons and tons of these mines since the 1970's not because the ore was played out but because the market price dropped so low they were no longer profitable. If Australia makes its mines less profitable then the newly reopened mines in other countries then, like Thatcher's Britain, they're going to have a **** ton of shuttered mines.

Sorry but iron and coal might get spot shortages but there is no shortage of alternatives on Earth so in a couple of years those high prices are going to be replaced by market gluts. It's the way such commodity markets work.

[trev]

As more details about the super tax are coming public, it is becoming obvious its reach will be much farther than originally realised. Not only does it include our major export earnings, but everything that comes out of the ground, therefore including businesses who are owner/operater types and others with several employees, who may be extracting sand, lime, rocks, limestone etc for building materials. In many cases these very small business which have just grown up over the years will have very little capital involved, making it almost certain they will meet the threshold for the super tax.
Majority public support for the tax when it was first announced has now dissipated and latest polls are now showing a clear majority against the tax as people realise its effects on businesses and the economy and their superannuation nest eggs seeing most of those have mining shares in their portfolio. The opposition parties have now clearly taken a stance against the tax promising immediate repeal if they ever become the government and after 4 years of opinion polling favouring the Labor Party, they have now swung to favour the opposition parties in polling done by all the major pollsters.
So Chavez type tactics do not seem to work in Australia and what the government thought would be an easy tax to sell has cost it a lot of support.

[N35t0r]

Copying Chavez style economics, will lead Australia to economic ruin. The only lesson we should take from Venezuela, is what not to do to your economy.

BC, let's be honest. Australia isn't talking about putting stupid price controls in place (which is absolutely what caused the shortages and crashed Venezuela's economy) and instead is simply talking about the tax rate to charge corporations for extracting minerals in Australia.

This.

In fact, without the Oil money, they'd be much much worse off.

[trev]

Massive projects worth tens of billions of dollars have now been put on hold due to the super tax. Andrew Forrest in placing 2 huge projects on hold stated that he could no longer obtain financing for the projects because the banks no longer considered his cash flow substantial enough to repay the needed loans. 30 000 high paying jobs are put on hold as a result.
It seems from cancellations and suspensions of projects so far that probably about 1/3 of the projected revenue from the new tax has already been lost in probable revenues of company and income taxes from suspended and cancelled projects as well as many tens of thousands of projected jobs now no longer there. Just the announcement of this tax is costing the Australian economy huge potential investment. The government has staked its credibility so strongly to the tax that there is no way it will consider backing down.

[Seeker]

Keep taxing them, more money for Canada.

[ricketyclik]

US study widens the mining companies’ credibility gap
by Bernard Keane

The study the federal government is citing in its counter-attack against the mining industry’s claims about the impact of the RSPT is a wide-ranging international study by one of America’s most prominent economic research establishments.

And it demolishes the industry’s claims to already be paying high tax rates, instead showing that Australian mining companies are some of the lowest–taxed corporations in the world.

BHP has been peddling the claim that the mining industry would face an increase in its effective tax rate from 43% to 57% under the RSPT. Several commentators, including Paul Kelly and Peter Van Onselen, bought it. “Most economists agree it will tax the industry’s profits at an accumulated rate of around 57 per cent,” van Onselen tried to claim yesterday, without identifying any economists who agree with that.

It’s garbage. The average effective tax rate of mining multinationals in Australia is 13%. How do we know?

Last year two American tax economists, Douglas Shakelford and Kevin Markle, looked at effective tax rates faced by multinational and domestic companies around the world (the study is here, but you’ll have to buy it).

Andrew Robb claimed this was a “graduate paper”, which must come as a shock to Shakelford, who is Distinguished Professor of Taxation at the University of North Carolina and has worked on several similar studies over the past two decades. And a shock to the National Bureau of Economic Research, which published the paper.

The NBER is pretty much the ne plus ultra of American economic research institutions. It’s the outfit that determines when the US enters and leaves recessions.

The point of the study was to determine whether there was any truth to claims from progressive politicians that multinational companies enjoyed lower tax rates than domestic-only companies. Their conclusion was that multinationals faced pretty much the same effective tax rates as domestic companies. In demolishing the populist case for special taxation arrangements for multinational companies, Shakelford and Markle were hardly engaged in some left-wing frolic.

It’s the sort of study large transnational companies would cite in their defence against the charge that they don’t pay enough tax.

But Markle and Shakelford found some exceptions to the general case that multinationals pay the same level of tax, and we’ll get to those.

Along the way, they made some broad observations about effective tax rates faced by corporations. Japan was the highest-taxing country, and the US was above-average. Companies domiciled in tax havens (no kidding) and Asian countries had lower ETRs. ETRs had also fallen significantly pretty much across the board for companies in the past two decades, but slightly faster in Australia and Canada.

Their study was not about individual companies.

It aggregated data from the tax paid by, and profits before tax of, companies across countries and industries. It then compared ETRs faced by multinationals and domestic companies in different industries in different countries. It found mining multinationals faced an ETR in Australia of 13%, the lowest rate of any country studied, lower than Europe (16%) or Canada (17%), which is apparently poised to use the RSPT to steal mining investment from us.

And in fact this ETR rate was one of the lowest of ANY country for ANY industry (for the record, retailers face the highest ETRs in Australia, at 27%, and it’s a worldwide phenomenon that retail pays high ETRs).

It was also unusually and significantly lower than the ETR of our domestic miners, who on average pay 17%.

This study had nothing to do with the Henry Review (which quoted it), or for that matter Australia. It was entirely independent and unrelated.

The Minerals Council yesterday attacked the study as a “small American study”. How small would such a study have to be to be considered too small? One hundred companies? Five hundred companies? One thousand companies? The number of companies that form the basis of the study is more than 27,000. They were culled from a larger sample of 42,000 to improve accuracy. The final sample included more than 980 mining companies.

I asked the MCA yesterday if they had anything to show how the study was flawed, beyond being “small” (a small sample size of course could understate or overstate ETRs depending on the companies that ended up in the sample). They directed me to a Citigroup study released before the release of the Henry Review.

The study compared different royalty rates across the world and found that Australia had among the highest royalty rates. It also tried to assess the total tax burden faced by mining companies, but did this simply by adding royalties to the official corporate tax rate, without any adjustment for what tax breaks, concessions and deductions miners could claim.

The American study, in contrast, looked at actual tax paid by companies. Inconveniently for the MCA, the study also warned that Africa (another purported destination for capital driven away by the RSPT) was a big risk for mining companies due to rising taxes there.

It was also a Citigroup analysist who, after the Henry Review announcement, declared “that BHP, RIO and OZL may have been sold off too hard given the likely limited RSPT impact, we reiterate our BUYS on these stocks”.

This morning the Minerals Council changed tack and cited ATO data to claim that the industry faced the highest ETRs in the country. However, that data is based on net income, not profit before tax, as the US study is, and relies on ATO’s domestic data, rather than companies’ own reported tax and profit results across all their operations.

Far from the government preparing to cave in on the issue, as some hysterical commentators are trying to suggest, its resolve is hardening. Labor knows a backflip on the issue will be politically fatal to its credibility. It is prepared to negotiate aspects of the new regime, but it is also aware that different sections of the mining industry have different stakes in this — so far we’ve mainly heard from the big foreign companies, not smaller local companies that will benefit from the shift from a royalty to a profits-based regime.

But the government will be heartened that the business sector is saying the miners have wildly overreacted. Even the Fin Review today could no longer hide the views of senior business figures, including Roger Corbett, in support of the RSPT.

Maybe the American study is flawed. Maybe 26,000 companies is too small a sample, and the National Bureau of Economic Research hasn’t a clue. But neither the MCA nor the opposition have produced anything to show that.

The credibility gap between what the miners and their cheerleaders say and reality grows ever bigger. Don’t fall in, guys.

.

[trev]

BHP has been peddling the claim that the mining industry would face an increase in its effective tax rate from 43% to 57% under the RSPT. Several commentators, including Paul Kelly and Peter Van Onselen, bought it. “Most economists agree it will tax the industry’s profits at an accumulated rate of around 57 per cent,” van Onselen tried to claim yesterday, without identifying any economists who agree with that.

It’s garbage. The average effective tax rate of mining multinationals in Australia is 13%. How do we know?

What a load of crap! Go and peddle the governments nonsense, but do not expect others to believe you.
The figures for Australia in this report ALSO include New Zealand. The researchers were not willing to separate the two countries because its focus was in other areas of the world.
The figures for the report EXCLUDE royalty taxes, fuel excise taxes, payroll taxes, fringe benefit taxes etc. The figures include one tax only, company tax.
The reason why the government uses this report RATHER than data from their own tax bureaucracy is that the data from their own tax office approximately supports the miner's arguments.
The Labour government 20 years ago introduced a resource tax on offshore oil drilling. They claim that the industry has prospered despite this. However it took 20 years before the first new substantial project commenced under that tax, the major NW shelf project being excluded from the tax. It is only now that oil prices globally have stayed at high levels for a time that exploration has begun to resume in significant quantities and companies are willing to invest in new projects.
Australia as a country cannot afford 20 years without significant resource development and already this proposed tax has seen enormous investments suspended and cancelled, and at the rate the suspensions are happening it is possible there will be no net gain in tax to the government, only a enormous number of lost jobs and lost export earnings required to cover our large trade deficit. The government is on a kamikaze mission which it does not know how to stop. The tax will never happen as Labour will lose the next election. They have stuffed up big enough that it will be the first time an elected Federal governmnet in Australia has lost power after its first term in 80 years. The last time was the result of the Great Depression, and a Great Depression is now landing on the head of the Rudd Labour party.

[Dinner]

My personal belief is that the American economic researchers are correct and that the companies effectively have a very low tax rate. Modern tax codes tend to be very complex and skilled actors with money (like mining companies) can indeed milk the system to get out of paying most of their taxes. The best solution would be simplifying the tax code to prevent this abuse but if Australia is unable for political reasons or unwilling then raising their official tax rate would indeed result in raising their defacto tax rate. They still have to operate where the minerals are found but special care must be taken so that Australia doesn't price produce out of international markets. So proceed slowly.

[trev]

My personal belief is that the American economic researchers are correct and that the companies effectively have a very low tax rate. Modern tax codes tend to be very complex and skilled actors with money (like mining companies) can indeed milk the system to get out of paying most of their taxes.

True to some extent. The company tax rate here is 30% and depending on facts used they pay around 13 - 17% of their gross profit in company taxes, so yes they seem to be able to halve that. There are less ways however to work around the royalty taxes, fuel excise taxes, local gov't rates, payroll taxes, stamp duties etc which are all there as well and were not considered in the American's report. When all these are included as well, the effective rate rises to about 40% of profit (not sure whether gross profit or net profit is correct here) with the 40% super tax adding about another 14% to this figure. But the current effective rate of 40% if all taxes are considered is still quite high.
It should not be forgotten that the major companies also build roads, railways, towns, airports to service their mines at company expense, so this is another cost that reduces their profits, and substituting for taxes as gov'ts are usually responsible for these things.