Minerals Resource Rent Tax
The Chamber of Minerals and Energy of Western Australia
Minerals Resource Rent Tax Presented by Damian Callachor Director PTG Consultation Session, Perth 7 October 2010
WA Resource Sector Major driver of the state economy: • $70.9 billion in production value (Growth of 14% per annum over last decade) • 89% of the State’s merchandise export income • $3.27 billion in State royalties • 85,000 people directly employed in mining + petroleum • Mining component of WA GSP: 27%
Sources: Department of Mines and Petroleum Value of WA’s Minerals and Petroleum Industry 2009-10 ; WA Department of Treasury and Finance, State Budget Results 2009/10 Note: Graph shows original estimate of 2009/10 royalties by DTF of $2.8b; actual results is $3.27B
16/09/2010
www.cmewa.com
2
Resources Rent Tax CME has always maintained a strong preference for retention of the current state regime, administered by the state government with revenues flowing to the state. Notwithstanding, CME has supported genuine reform of the Australian taxation system and argued, in relation to any consideration of a federal tax on resources, that it should: – be prospective, that is, apply to only new investment – protect Australia’s international competitiveness – be differentiated by resource commodities – be levied on primary resource value – Be efficient and equitable While CME welcomes the removal of the Resources Super Profits Tax (RSPT) and acknowledges the progress under the proposed Minerals Resource Rent Tax (MRRT), there still exists a number of fundamental issues, key amongst them the impact on Australia's international competitiveness. 16/09/2010
www.cmewa.com
3
MRRT - Key Issues CME has the following key concerns with the policy and design of the MRRT: – Lack of genuine tax reform and consultation to date – Impact on Australia’s international competitiveness – Impact on Australia’s sovereign risk profile – Taxing point – Resource valuation – Uplift rate – Threshold - rate and operation – Crediting of royalties – Deductibility of financing costs – Project losses and transferred losses 16/09/2010
www.cmewa.com
4
International Competitiveness Under the MRRT, the ~45%overall1 effective tax rate will make Australia one of the highest taxed mining jurisdictions in the world for iron ore and coal.
1. Calculated as follows: MRRT rate of 30% less the extraction allowance of 25% = MRRT effective tax rate of 22.5%. Plus corporate tax of 30% less deduction for MRRT paid = total effect tax rate of 45.75%. Applying to pre-mine gate activities and assuming no starting base deductions of uplift at LTBR + 7% 2. Source: Minerals Council of Australia, Potential Financial Impacts of the Resources Super Profits Tax On New Projects In Australia, 1 June 2010.
16/09/2010
www.cmewa.com
5
International Competitiveness Australia does not have a stranglehold on any commodity in terms of world trade: not iron ore, not alumina, not nickel, not LNG or mineral sands. That means we are a price taker.
Source: Department of Mines and Petroleum, WA
16/09/2010
www.cmewa.com
6
Competition for Foreign Investment •
The Australian resources industry is heavily driven by foreign investment in the exploration, development and production stages.
•
The Foreign Investment Review Board’s 2009 Annual Report showed there were $90.6 billion of approvals of proposed investments in mineral exploration and development ($64.3 billion in 2007-08)1
•
Mining, above all other industries, relies on foreign investment. In 2008, direct foreign investment (DFI) in the mining industry was ~ $100 billion.
•
Australia is competing against other jurisdictions for this foreign capital. For example, the was CA$104 billion of FDI in Canada in 20093.
Source: 1. Foreign Investment Review Board Annual Report 2008/9, Table 2.4: Total approvals by industry sector in 2008-09; 2. ABS: 53520 - International Investment Position, Australia: Supplementary Statistics, 2008 - Table 15a. Foreign Investment in Australia(a): Level of Investment at 31 December 2008 by Industry Division (ANZSIC), Direct Investment in Australia 3. Foreign Affairs and International Trade Canada, Foreign Direct Investment Stocks in Canada, CANSIM Table 376-0052
16/09/2010
www.cmewa.com
7
Sovereign Risk •
Resource Rent Taxes, introduced without consultation, have a significant impact on a jurisdiction’s attractiveness to investment.
•
The Fraser Institute’s 2010 mid-year mining survey, taken while the RSPT was still on the table, showed the following with respect to exploration investment attractiveness:
•
–
The average score of the Australian states declined from 62.9 out of 100 in the 2009/10 annual survey to 40.9 in this survey up date.
–
The average rank of the Australian states fell to an average of 31st out of 51 jurisdictions in the update from 18th in the 2009/2010 index.
–
Both Nevada and Quebec also suffered drops in their attractiveness to investment due to attempts to introduce resource rent taxes, in Quebec's case without consultation.
Further, resource projects ability to raise capital overseas, particularly in the USA and UK, has been severely was severely impacted by the announcement of the RSPT announcement and to a lesser, but still significant extent, the MRRT.
Source: The Fraser Institute Survey of Mining Companies: 2010 Mid-year Update was sent to approximately 3,000 exploration, development, and other mining-related companies around the world. The survey, conducted from June 1 to June 30, represents responses from 429 of those companies; 51 jurisdictions were ranked.
16/09/2010
www.cmewa.com
8
Key Issues Taxing point: – CME advocates the taxing point be at the primary crusher in line with the MRRT policy of taxing the resource and not any value add. This can be applied consistently across different commodities, mining methods and mining operations Resource valuation – CME advocated the use of CUP or, if not available, netback to determine the value of the resource. For netback, arms length must apply to all downstream activities/transactions to determine an accurate taxable value of the resource Uplift rate – CME has concerns the uplift rate (LTBR +7%) does not reflect the cost of capital for some miners, especially those with a weak balance sheet and rely on the debt market MRRT Threshold – CME advocated the MRRT apply only to profits exceeding the threshold. Furthermore, CME advocates an increase in the threshold under the full impact of on Australia’s international competitiveness and sovereign risk is understood 16/09/2010
www.cmewa.com
9
Key Issues (cont.) Crediting of Royalties: – CME advocates the provision of a full royalty credit, including potential rate increases, to provide certainty as to the maximum effective tax rate applicable projects. Deductibility of financing costs – CME recommends the PTG review the deductibility of financing cost, especially for starting bases determined by the market value method. Project losses and transferred losses – CME advocates taxpayers should be able to choose how much loss to use or transfer to other projects. Administration and Compliance Costs – CME recommends low value resources, such as magnetite, which are likely to pay minimal, if any, taxes have adequate transitional allowances and shelter from the ongoing administrative burden of MRRT compliance.
16/09/2010
www.cmewa.com
10
Conclusion • CME preference is for retention of the current state regime, administered by the state government with revenues flowing to the state. • While CME supports genuine reform of the Australian taxation system, it has concerns over the MRRT and its impact on Australia’s international competitiveness. • CME believes those projects that have low value resources and significant value add processing infrastructure, such as magnetite, will be facing significant administrative and compliance costs not commensurate with their expected low MRRT tax liability. • CME has lodged a joint submission to the PTG with the Minerals Council of Australia and other state peak bodies. • CME will also be lodging a separate submission prior to the 28 October 2010 deadline.
16/09/2010
www.cmewa.com
11
For further information please contact The Chamber of Minerals and Energy of Western Australia (CME) Locked Bag N984, Perth WA 6844 Telephone: (08) 9325 2955 Fax: (08) 9221 3701 Email: [email protected] Web: www.cmewa.com
17/06/2010
Minerals Resource Rent Tax Presented by Damian Callachor Director PTG Consultation Session, Perth 7 October 2010
WA Resource Sector Major driver of the state economy: • $70.9 billion in production value (Growth of 14% per annum over last decade) • 89% of the State’s merchandise export income • $3.27 billion in State royalties • 85,000 people directly employed in mining + petroleum • Mining component of WA GSP: 27%
Sources: Department of Mines and Petroleum Value of WA’s Minerals and Petroleum Industry 2009-10 ; WA Department of Treasury and Finance, State Budget Results 2009/10 Note: Graph shows original estimate of 2009/10 royalties by DTF of $2.8b; actual results is $3.27B
16/09/2010
www.cmewa.com
2
Resources Rent Tax CME has always maintained a strong preference for retention of the current state regime, administered by the state government with revenues flowing to the state. Notwithstanding, CME has supported genuine reform of the Australian taxation system and argued, in relation to any consideration of a federal tax on resources, that it should: – be prospective, that is, apply to only new investment – protect Australia’s international competitiveness – be differentiated by resource commodities – be levied on primary resource value – Be efficient and equitable While CME welcomes the removal of the Resources Super Profits Tax (RSPT) and acknowledges the progress under the proposed Minerals Resource Rent Tax (MRRT), there still exists a number of fundamental issues, key amongst them the impact on Australia's international competitiveness. 16/09/2010
www.cmewa.com
3
MRRT - Key Issues CME has the following key concerns with the policy and design of the MRRT: – Lack of genuine tax reform and consultation to date – Impact on Australia’s international competitiveness – Impact on Australia’s sovereign risk profile – Taxing point – Resource valuation – Uplift rate – Threshold - rate and operation – Crediting of royalties – Deductibility of financing costs – Project losses and transferred losses 16/09/2010
www.cmewa.com
4
International Competitiveness Under the MRRT, the ~45%overall1 effective tax rate will make Australia one of the highest taxed mining jurisdictions in the world for iron ore and coal.
1. Calculated as follows: MRRT rate of 30% less the extraction allowance of 25% = MRRT effective tax rate of 22.5%. Plus corporate tax of 30% less deduction for MRRT paid = total effect tax rate of 45.75%. Applying to pre-mine gate activities and assuming no starting base deductions of uplift at LTBR + 7% 2. Source: Minerals Council of Australia, Potential Financial Impacts of the Resources Super Profits Tax On New Projects In Australia, 1 June 2010.
16/09/2010
www.cmewa.com
5
International Competitiveness Australia does not have a stranglehold on any commodity in terms of world trade: not iron ore, not alumina, not nickel, not LNG or mineral sands. That means we are a price taker.
Source: Department of Mines and Petroleum, WA
16/09/2010
www.cmewa.com
6
Competition for Foreign Investment •
The Australian resources industry is heavily driven by foreign investment in the exploration, development and production stages.
•
The Foreign Investment Review Board’s 2009 Annual Report showed there were $90.6 billion of approvals of proposed investments in mineral exploration and development ($64.3 billion in 2007-08)1
•
Mining, above all other industries, relies on foreign investment. In 2008, direct foreign investment (DFI) in the mining industry was ~ $100 billion.
•
Australia is competing against other jurisdictions for this foreign capital. For example, the was CA$104 billion of FDI in Canada in 20093.
Source: 1. Foreign Investment Review Board Annual Report 2008/9, Table 2.4: Total approvals by industry sector in 2008-09; 2. ABS: 53520 - International Investment Position, Australia: Supplementary Statistics, 2008 - Table 15a. Foreign Investment in Australia(a): Level of Investment at 31 December 2008 by Industry Division (ANZSIC), Direct Investment in Australia 3. Foreign Affairs and International Trade Canada, Foreign Direct Investment Stocks in Canada, CANSIM Table 376-0052
16/09/2010
www.cmewa.com
7
Sovereign Risk •
Resource Rent Taxes, introduced without consultation, have a significant impact on a jurisdiction’s attractiveness to investment.
•
The Fraser Institute’s 2010 mid-year mining survey, taken while the RSPT was still on the table, showed the following with respect to exploration investment attractiveness:
•
–
The average score of the Australian states declined from 62.9 out of 100 in the 2009/10 annual survey to 40.9 in this survey up date.
–
The average rank of the Australian states fell to an average of 31st out of 51 jurisdictions in the update from 18th in the 2009/2010 index.
–
Both Nevada and Quebec also suffered drops in their attractiveness to investment due to attempts to introduce resource rent taxes, in Quebec's case without consultation.
Further, resource projects ability to raise capital overseas, particularly in the USA and UK, has been severely was severely impacted by the announcement of the RSPT announcement and to a lesser, but still significant extent, the MRRT.
Source: The Fraser Institute Survey of Mining Companies: 2010 Mid-year Update was sent to approximately 3,000 exploration, development, and other mining-related companies around the world. The survey, conducted from June 1 to June 30, represents responses from 429 of those companies; 51 jurisdictions were ranked.
16/09/2010
www.cmewa.com
8
Key Issues Taxing point: – CME advocates the taxing point be at the primary crusher in line with the MRRT policy of taxing the resource and not any value add. This can be applied consistently across different commodities, mining methods and mining operations Resource valuation – CME advocated the use of CUP or, if not available, netback to determine the value of the resource. For netback, arms length must apply to all downstream activities/transactions to determine an accurate taxable value of the resource Uplift rate – CME has concerns the uplift rate (LTBR +7%) does not reflect the cost of capital for some miners, especially those with a weak balance sheet and rely on the debt market MRRT Threshold – CME advocated the MRRT apply only to profits exceeding the threshold. Furthermore, CME advocates an increase in the threshold under the full impact of on Australia’s international competitiveness and sovereign risk is understood 16/09/2010
www.cmewa.com
9
Key Issues (cont.) Crediting of Royalties: – CME advocates the provision of a full royalty credit, including potential rate increases, to provide certainty as to the maximum effective tax rate applicable projects. Deductibility of financing costs – CME recommends the PTG review the deductibility of financing cost, especially for starting bases determined by the market value method. Project losses and transferred losses – CME advocates taxpayers should be able to choose how much loss to use or transfer to other projects. Administration and Compliance Costs – CME recommends low value resources, such as magnetite, which are likely to pay minimal, if any, taxes have adequate transitional allowances and shelter from the ongoing administrative burden of MRRT compliance.
16/09/2010
www.cmewa.com
10
Conclusion • CME preference is for retention of the current state regime, administered by the state government with revenues flowing to the state. • While CME supports genuine reform of the Australian taxation system, it has concerns over the MRRT and its impact on Australia’s international competitiveness. • CME believes those projects that have low value resources and significant value add processing infrastructure, such as magnetite, will be facing significant administrative and compliance costs not commensurate with their expected low MRRT tax liability. • CME has lodged a joint submission to the PTG with the Minerals Council of Australia and other state peak bodies. • CME will also be lodging a separate submission prior to the 28 October 2010 deadline.
16/09/2010
www.cmewa.com
11
For further information please contact The Chamber of Minerals and Energy of Western Australia (CME) Locked Bag N984, Perth WA 6844 Telephone: (08) 9325 2955 Fax: (08) 9221 3701 Email: [email protected] Web: www.cmewa.com
17/06/2010
