Debate about rates is masking a thorough understanding of the extraordinary mining tax mechanism.
WAS Fortescue Metals Group CEO Andrew Forrest right to use the term ‘nationalisation’ to describe the federal government’s proposed resource super profits tax?
As debate around the new tax entered its fourth week unabated, the headline argument between industry and the government was centred on how much tax miners paid, rather than any detailed understanding of how the resource super profits tax – a modified version of a tax system devised in 1948 by American economist E Cary Brown – actually works.
But a study by WA Business News of papers and speeches linked to the government tax move show there appears to be more than an element of truth in what Mr Forrest said, even if actual ownership or title of mining projects by the state never actually takes place.
In 2007, the Australian Bureau of Agricultural and Resource Economics, described the concept behind the RSPT as including the government as a “silent partner” in resources projects.
Treasury Secretary Ken Henry, who used the same language in a recent explanation of the tax (see page 32), explains that the government-proposed RSPT is the equivalent of a so-called Brown tax, or pure rent tax, in which “the government is, effectively, a silent partner”.
And, in a summary produced by federal Treasury adviser KPMG Econtech, the arrangement describes the government as a “de facto joint venturer” to whom resources companies provide “de facto loans”.
Early in the debate, some who back the proposed new tax labelled Mr Forrest’s comments as ‘hysteria’.
“This is a nationalisation of 40 per cent of the mining industry and the first step towards where the despotic economies go when they start nationalising industry,” Mr Forrest told the ABC.
Rio Tinto chief executive Tom Albanese has also backed this view, raising the sovereign risk concern to the highest order.
“For good reason, people are beginning to use terms like nationalisation and expropriation for this new partnership,” Mr Albanese told AAP.
In his address last week to a group of business economists, Dr Henry agreed there was confusion in the market, noting the theory of the tax was not familiar even to the audience he was addressing.
But for those who are worried the tax is really the government taking ownership of part of each mining project, Dr Henry’s words would offer little reassurance.
Dr Henry points out that, after the introduction of the RSPT, resources investors would no longer be 100 per cent owners of the project. Instead they will hold two assets – a 60 per cent share in the project and a risk-free tax credit valued at the present value of 40 per cent of the initial investment.
“Another way of looking at the tax credit is that it is effectively the same as the government giving resources companies a government bond equal to 40 per cent of the investment costs, but with one difference; unlike a traditional government bond, payment occurs when the project makes a profit or, if the project is unsuccessful, when the project closes,” Dr Henry said.
In this way, Dr Henry is explaining the de facto loan described below by KPMG.
“The second element is a provision for the government’s contribution to the de facto joint venture in the loss-making early years to be covered by de facto loans from the resource company to the government,” KPMG said.
“The guaranteed repayment of the loan including interest, occurs as an offset against the tax liability in the profit-making years, with any residual amount paid out at project close.”
In other words, the government appears to be buying its way into the project with a loan from the resource project’s original investors of 40 per cent of the capital cost, for which it pays 6 per cent interest – the government bond rate.
In effect, interest and debt repayments are deducted from any earnings before the Commonwealth takes its 40 per cent share of the profits.
At the end of the project, in theory at least, the government pays back anything that remains owing, even in the event of failure.
Curtin School of Business professor of economic policy Peter Kenyon believes the uproar over the tax is misguided and, in part, a reaction to poor implementation.
Professor Kenyon interprets terminology about de facto loans and Dr Henry’s “silent partnership” differently from the mining companies’ nationalisation call.
“He seems to be saying the state has a right over the way these resources are exploited,” he said.
