Mining Democracy


Miners finally agree to tax reform. What are the changes?

The attempt to harness economic rents for the public good has been renamed from the Resource Super Profits tax to the Mineral Resource Rent Tax.

The MRRT kicks in at the corporate bond rate plus 7%. That is 12%, rather than the proposed 5%.

The taxable rate has been dropped from 40% to 30%*.

* We are concerned about this bolded line in the Treasurer’s press release:

Iron ore and coal will be subject to a new profits-based Minerals Resource Rent Tax (MRRT) at a rate of 30 per cent.

* MRRT assessable profits are calculated on the value of the commodity, determined at its first saleable form (at mine gate), less all costs to that point.
* Projects will be entitled to a 25 per cent extraction allowance that reduces taxable profits subject to the MRRT. This allowance recognises the contribution of the miner’s expertise to profits at the mine gate.


Miners can add an additional 25% to their extraction expenses, inferring that the real effective tax rate will not be 30% but 22.5%. Sneaky! Will such wordsmithing go over well with the electorate?

Mining assets can now be marked at market value, allowing considerable depreciation write offs. This offsets the ‘retrospectivity’ argument. Throwaway machinery will be encouraged. Anecdotal reports of giant pac-man type robots working underground being just left behind, buried, when they are retired. Let’s hope they are made to corrode ‘environmentally’.

Only companies earning over $50m in profits will pay the MRRT. We hope the use of shelf companies in tax havens doesn’t proliferate for those companies operating in this profitable vicinity.

Gold and other less profitable resources have been left out of the agreement.

Improvements:

The new Mineral Resource Rent Tax name – much better to share the rents rather than demonise profits.

The Politics

The miners ran a better campaign, a campaign run on mis-truths and more emotive communication.

If only Paul Keating were in office. He would have hit back hard at the miners, calling on all Australian’s to roll out the red carpet for the magnates where ever they went. He would have filled our heads with visions of the small businessman polishing his shoes and sweeping his pavement.

Keating would have trumpeted the new resource sovereignty sweeping the world.

Israel’s Knesset Research and Information Center stated in a recent draft report:

Israel’s government takes between 35% and 40% of companies’ revenues from the extraction of natural gas, mostly in taxes and royalties. Other countries, however, get between 40% and 94%.



Some will be saying but even Keating got whipped by the property lobby over removing negative gearing. Yes – the name of the game is mining democracy for vested interests.

New PM Gillard showed how compromise politics can work. The public is greatful to receive $7.5bn extra in revenue. With BHP averaging profits in the $20bn mark, this will be nothing spread amongst the big 3 miners of Rio Tinto, BHP and Xstrata.

Australia’s 2nd richest, Andrew Forrest (Fortescue) will no doubt have his face all over the press with a big smile. What unique concessions did he pull to shut out competition from smaller miners down the ladder?

Let’s hope he doesn’t turn his attention to having Ken Henry sacked.

What have we learnt from this experience?

Simplicity is the key for all tax reform. Joe Public must be able to understand it.

We still believe an ad valoreum tax is fairer. Profits based taxes encourage bloated mining management fees and unnecessary complexity.

The public’s attention may well have been inspired using the profits to share amongst all citizen’s as part of a citizen’s dividend. This is a long way from our ideal aim but it would help as a first step in building the public’s understanding of how much money is being pocketed by rent seeking
(PDF).

It seemed that small business was kept out of the loop, as defined by the decision to stage a debate between Paul Howes, representing the working man, and Clive Palmer, of the mining interests at the National Press Club. This really should have been between small business and mining. Look at how profitable mining is.

Where was the Australian Chamber of Commerce and Industry? Finally we heard from them yesterday. Small miners also belatedly got to have a say as the ink was all but drying on the new ‘heads of agreement’ document between government and mining.

Who would want to go into small business when there are so many more profits in mining? This poor media presence has cost small business, our largest national employer, $1.5bn in additional taxes. That is what has been lost in the compromise, a 16% handback to the magnates.

A useful report to read on mining business risks can be found via Ernst & Young (sorry this PDF has been removed from public viewing) , where in the steps to avoid Resource Nationalism suggestion box (p18) one can read how miners should:

Align with multi-lateral agencies, such as the World Bank, to achieve a ‘prominent victim’ status in the face of mounting resources nationalism.


Read the Treasurer’s Press Release with attachment for more detail.

Listen to the Renegade Economists podcast for more on this hot topic in next week’s show.

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https://prosper.org.au/2010/07/02/mining-democracy/