Taxing Times: Resources Super Profits Tax (RSPT) Negotiations
One of the first actions by the new Labor government leadership was to adopt a more conciliatory approach to the proposed resource super profits tax (RSPT). The government is eager to approach the big Aussie miners BHP Billiton, Rio Tinto and Xstrata, in order to establish a new process for resolving the proposed RSPT issues.
Under the original RSPT proposal the government has estimated tax takings of $12 billion in the first two years. Most of these takings will come from BHP and RIO and it is estimated the earnings will be hit by 15% for BHP and 25% for RIO.
Any compromise over the proposed tax will impact the federal budget forecasts, with treasurer Wayne Swan quick to reiterate that cuts backs in the RSPT revenue will impact the Budgets in the areas of superannuation, company tax cuts and infrastructure spending commitments.
Miners are fiercely combating the proposed RSPT because it is seen as setting a precedent for overseas governments in relation to their tax environments into the future. The big miners of course are not interested in whether the government can balance its budget, but they have made moves to negotiate over the tax.
BHP’s CEO Marius Kloppers was quick to offer the government an olive branch in suspending their damaging advertising campaign, however at the same time he restated the stance of the big miners that the new tax: should only apply to new projects, should distinguish between the commodities being mined and should be levied close to the extraction point. The big miners are prepared to pay more tax, indicating support for a profit based tax to replace royalties.
RSPT – The Government and Miners Need to Resolve:
The question that needs to be resolved in any negotiations include:
What will the tax rate be? Currently the tax rate will be 40 per cent.
Will the new tax apply to existing projects? Big miners say NO! The government will be keen to see the tax to apply to existing projects because that will encompass the highly profitable Pilbara mines in Western Australia.
What is the threshold rate where the tax will kick in? Miners wants a significant
increase in the threshold at which the levy kicks in ( from 6% up to 15%)
How will the new tax impact on depreciation allowances?
What will happen with write-offs for new capital spending?
How will the tax be applied to assets? Whether at book or market value.
At what point will the tax be levied? Big miners are pushing for the point of extraction, but the government is also considering taxing after any value-adding due to processing has occurred.
Our View – The Proposed RSPT is Hurting Our Mining Sector
Mining activities have been impacted as a result of this new proposed tax. Miners have shelved some projects, banks are re-evaluating extension of credit for projects, foreign investment has been withdrawn due to the ongoing uncertainty over the tax and we have seen weakness in the Aussie dollar.
The government is still under pressure to resolve this issue before the looming federal election, and miners are threatening to resume their advertising campaign in the next two weeks. Fortescue’s CEO Andrew Forrest claims that he was close to resolving the issue with Prime Minister Kevin Rudd before the leadership challenge, so you would expect this to provide a base level for ongoing discussions.
There is a case for both parties to compromise on the tax. This is particularly the case given the continuing uncertainty regarding the global economic outlook as seen overnight. We expect that this RSPT has to be resolved before the next federal election.
By Micheal Hevern
Head of Research
