Thursday, 27 May 2010 07:57

In Australia, Tax as a Contagion

From Blomberg: Mining Tax ‘Contagion’ Set to Spread From Australia:

May 20 (Bloomberg) -- Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.

“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”

The new Australian mining tax coupled with rising worries over possible slowdown in China has become a serious concern for both domestic and international mining companies that have substantial exposure to Australian mining assets.

Here's a synopsis on the topic from my point of view...

Australian Mining Tax

The Australian government has planned a 40% tax on “super” profits (profits above the long-term government bond rate) of all mining companies. This new tax will be levied beginning July 2012, and would apply to all commodities covering both existing and new projects.

  • According to the government estimates, this new tax will generate estimated proceeds of A$9bn ($8.1bn) a year from 2013-14, and would be used to fund a cut in the company tax rate from 30% to 28%, higher pensions and infrastructure spending.

Impact on the Australian Economy

This new tax is expected to have an adverse impact on Australia’s economy as mining companies make up nearly 9% of the total economy and played a key role in saving the Australian economy from the global financial crisis.

  • Higher mining taxes will drive away investment and capital from Australia to lower tax countries like South Africa, Canada and China.
    • According to Citigroup, the tax rate on Australian mining companies is estimated at 58% (from the current 35%) after implementation of the super profit tax, while other major commodities exporters including South Africa, Canada and China tax mining companies at significantly lower rates of 33%, 23% and 30%, respectively.  Moreover, Canada’s Finance Minister Jim Flaherty has commented that he’s opposed to raising taxes, and the Australian levy makes Canadian companies more competitive.
  • Moreover, mining companies have warned that the new super profit tax would endanger $108 billion of planned investments in the country. All major mining companies have raised fears that the new tax will make mining in Australia uncompetitive:
    • According to BHP’s CEO Marius Kloppers, “The stability and competitiveness of the tax system have been central to the investment in resources in Australia, if implemented, these proposals seriously threaten Australia's competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians".
    • Rio Tinto’s managing director - Australian operations David Peever, has warned that a 40% Super profit tax, combined with corporation tax, "would make the Australian minerals sector the highest-taxed in the world, seriously eroding competitiveness".
    • Xstrata’s chief of Australian Operations Mick Davis, commented in a press article “the group’s Australian operations had generated revenues of A$44bn since 2002, but it had spent A$45bn in Australia on mining investment, royalties to state governments and taxes. The proposed tax will significantly impair the cash flows available to sustain our operations and has introduced great investment uncertainty".

Impact on the Global Mining Industry

This new super profit tax will adversely impact the profitability of both domestic and international mining companies that have substantial assets in Australia.

  • In addition to domestic resources companies, the new super profit tax will affect international miners including BHP Billiton, Rio Tinto, Xstrata and Peabody Energy which hold substantial assets in Australia. Many international energy groups including the UK’s BG Group, Petronas of Malaysia, Royal Dutch Shell, US’ ConocoPhillips and PetroChina could also be adversely impacted owing to their planned investments in the country’s liquefied natural gas sector.
  • On the new super profit tax, BHP’s CEO Marius Kloppers commented, “If implemented, the effective tax rate of the company will increase to 57% in 2013 from 43% today on the earnings in Australia”
  • Analysts have also raised concerns on profitability of major mining companies post the new tax implementation:
    • According to an April 2010 Merill Lynch report, BHP, the world’s largest mining company with 51% of its assets in Australia, may have a 19% decline in its earnings if the tax is implemented, while Rio Tinto, which is the second largest exporter of iron ore and has about one-third of its assets in Australia, could see earnings decline by 30%.
    • According to UBS, the new tax may reduce BHP’s earnings by 17% and Rio Tinto’s by 21% in 2013.
    • Citigroup has commented, “Gold and copper companies, which pay royalties of 3%, will be most affected, while coal producers, which pay about 6% to 8%, may suffer less”.
    • According to Auditing firm Deloitte, the super-profits tax would cost the Australian mining industry an additional $2.78 billion for 2012-13, the first year it takes effect and $8.34 billion for 2013-14.
    • According to Moody’s, “mining companies’ earnings may be cut by almost a third when the tax starts in 2012. The tax would be broadly credit negative for the sector and raise uncertainty for some companies over the short-to-medium term”.
  • Consequently, most mining companies have either shelved off, or have put their Australian mining projects including acquisitions on hold, till they get the final status on the proposed tax scheme.
    • After the super profit tax announcement, US coal giant Peabody Energy reduced its offer to buy Queensland based Macarthur Coal by $300 million, Xstrata PLC has suspended its copper exploration in Australia, and BHP Billiton and Rio Tinto has held its decisions on key expansion projects until the proposed tax scheme is finalized.

The uncertainty:

Despite analysts’ and industry’s warnings the Australian government stands firm on its Super profit tax announcement. This stance has been corroborated in the India Times and the China Post). The only hope left for the mining industry is that the current government either fails to join office when elections are held this year, or, if the government survives, it fails to have the majority in Australia’s upper house Senate to have its tax legislation passed into law.

Another mounting fear for the mining industry is that if Australia – a country known for its stable fiscal regime – adopts such a tax, other countries will follow suit.

  • According to Evy Hambro, manager of BlackRock Investment Management’s flagship World Mining Fund, “’Resource nationalism’ is a major risk facing miners in the next few years”.
    • Chile, the biggest copper exporter, is proposing a temporary rise in mining taxes to help pay for earthquake reconstruction that may cost BHP, Xstrata and Anglo American $1.2 billion over the next two years.
    • Brazil, the second-biggest iron ore exporter, is also thinking on taxing shipments of the commodity or increasing royalties

Overall, though it is sure that the new super profit tax if implemented will adversely impact the mining companies, its implementation and related technical details are still unclear, thus making it difficult to gauge the exact impact of the “Super profit tax”.

Last modified on Friday, 28 May 2010 08:49