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Standing Committee on Economics

BROWN, Mr Stuart J, Tax Manager, ExxonMobil Australia Pty Ltd

DASHWOOD, Mr John R, Chairman, ExxonMobil Australia Pty Ltd


CHAIR: Welcome. Although the committee does not require you to give evidence on oath, I should advise you that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. We have received a written submission to this inquiry from you. Do you wish to make an opening statement to the committee?

Mr Dashwood : Thank you for the invitation to appear here today and for affording us the time to share our views and answer your questions in relation to schedule 2 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011. ExxonMobil Australia Pty Ltd and its subsidiaries have played a significant role in the development of Australia's oil and gas resources. We have a business history in this country stretching back more than 115 years. We are one of Australia's largest oil and gas producers and our activities cover exploration and production of oil and gas; petroleum refining; and, the supply of fuels including natural gas, lubricants, bitumen and chemical products. We are a substantial investor in the Australian economy and a major contributor to the wealth of the nation. Annually ExxonMobil pays around $2.2 billion in taxes to local, state and federal governments.

Esso is a wholly owned subsidiary of ExxonMobil Australia. Esso is a participant in, and the operator of, the Bass Strait project where our co-venturer is BHP Billiton. The Bass Strait project has produced almost two-thirds of Australia's cumulative oil production and around 30 per cent of Australia's gas production. Since 1969, the Bass Strait project has contributed more than $200 billion to gross domestic product. We provide direct employment today to around 1,700 people and have stimulated approximately 50,000 permanent additional jobs in Victoria, 14,000 those in regional Gippsland. The Bass Strait project has been responsible for generating approximately $300 billion in federal government revenues in real terms which represents more than two per cent of all government revenues over the time the project has been in existence.

We continue to invest billions of dollars in Australia with capital expenditure of around $2 billion annually and we will continue to be a significant taxpayer in this country for decades to come. We value predictable, stable and certain fiscal regimes and taxation frameworks as we make massive investments in long-term projects with life cycles lasting multiple decades.

The bill we are here to discuss includes an amendment to the Petroleum Resource Rent Tax Assessment Act 1987 which is to have retrospective effect from 1 July 1990. The amendment gives effect to the announcement by the Treasurer in the federal budget on 10 May this year. It effectively curtails ongoing litigation between the Australian Taxation Office and Esso. The 2011 budget announcement seeks to reach back 21 years and change the law retrospectively. It was completely unexpected. It seeks to impose a substantial and retrospective fiscal burden on Esso in addition to that which is, in our view, currently authorised by the law. Matters in this dispute are currently under appeal before the Federal Court. The dispute has been known to the ATO and the Treasury since shortly after the Bass Strait project was brought into the PRRT regime in 1991.

To be clear, we are not here to seek special treatment or exemption from the PRRT, nor are we seeking to convince the committee of the validity or otherwise of our taxing point dispute with the ATO. This is a question that should quite rightly be determined by the courts. We are here today to draw the committee's attention to the government's intention to interfere in the judicial process and potentially seek to deny Esso's right to have its appeal heard. It is clear that the proposed bill is designed to usurp the role of the judiciary by reinforcing a disputed decision in the government's favour. Passage of the retrospective PRRT measures in these circumstances would constitute an interference by parliament in a dispute between the government and an individual taxpayer. It disregards consistent advice received by governments past and present about retrospectivity in tax legislation and will damage Australia's international reputation and perceptions of sovereign risk in this country. It may well cause some investors to consider whether Australia is an appropriate destination for their mobile capital, especially at a time when international capital markets are extremely tight. The committee should recommend to parliament that it reject the retrospectivity of the proposed bill.

Globally, Exxon Mobil Corporation, the parent company of ExxonMobil Australia, the entity I represent, is the world's largest publicly traded international oil and gas company. It has a global business portfolio. It operates facilities or markets products in most of the world's countries and explores for oil and natural gas on six continents. ExxonMobil Australia competes with all other Exxon Mobil affiliates around the world for shareholder capital from Exxon Mobil Corporation. When deciding when and where to place its capital, Exxon Mobil Corporation assesses the various risks of operating in different countries. Included in this assessment is the political and economic risk that exists in these countries together with the broader investment profiles of different nations and regions. The separation of the judiciary and the parliament is a key factor when assessing the risks present in various economies. The blurring of this distinction is of concern to Exxon Mobil and will factor in future business decisions. Therefore government policy announcements that raise issues of sovereign risk, such as this retrospective legislation, send a worrying signal to business and discourage long-term large-scale investment. More importantly, we seek to draw the committee's attention to the unprecedented decision to seek to apply retrospective legislation not as an anti-avoidance measure but to a legitimate dispute over the meaning of a legislative provision while a proceeding is on foot in the Federal Court addressing the same issue.

In closing I respectfully thank the committee for the opportunity to provide comments at this time. We urge the committee to recommend to parliament that it reject the retrospectivity of the proposed bill. Mr Brown and I are happy to take any questions.

Mr Brown : Can I just make some comments on some of the previous discussion. I can give some assistance in regard to ATO pronouncements on the application of the regime. I have here a paper on the petroleum resource rent tax. It is an overview of the legislation with questions and answers presented by Frank La Scala, a principal advising officer from the Australian Taxation Office. It was presented at an ATO seminar on the PRRT in March 1992.

Mr TONY SMITH: If you address the range of questions the chair, Ms O'Dwyer and I put around that time frame, that might save a bit of time. That is useful.

Mr Brown : Frank La Scala wrote:

Some of these products—

He is talking about the products produced by petroleum projects—

are further defined by reference to their gaseous mixture, e.g. sales gas, defined as a mixture that includes methane where the methane comprises more than 50 per cent by weight of the mixture. It is quite possible that some of these products, e.g. sales gas, could be produced on the platform in view of their definition.

That is exactly the point we are making in our case. He continued:

It has been suggested that an MPC does not become and excluded product until it is in fact, from a practical point of view, marketable. That is so, it has been suggested, even if the product has been further processed or treated or has been moved beyond storage adjacent to the place of the production. The act does not ask when a commodity is in fact or from a practical point of view marketable; it defines an MPC and defines the point when the commodity becomes an excluded commodity. There is no room for the ATO to postpone the point at which an assessable petroleum receipt or an exploration recovery receipt is derived.

That is very much our case, and it was made by an ATO officer in 1992.

CHAIR: Are you going to submit that?

Mr Brown : We can submit that to you.

CHAIR: That would be useful, if you can. We can take it as an exhibit.

Mr TONY SMITH: That is a useful addition. Following that, at what point did you realise you had a heated disagreement, and what were the circumstances there?

Mr Brown : Given the uncertain nature of the tax, we filed our returns on a conservative basis initially, and we have continued to do that. Our first objection on this issue was filed in 1994, and it is from that point on that the dispute becomes real.

Mr TONY SMITH: Just to clarify what you are saying, you have filed on the basis of the tax office's interpretation?

Mr Brown : At that stage there was no interpretation. Remember that the PRRT was introduced in 1987. The first taxpaying project was an oil project in 1989. There was no sales gas subject to tax until the Bass Strait project came in. So—

Mr TONY SMITH: You have just given some evidence where the tax office, on your evidence, was in agreement with your position, as you put forward. When did you discover that they had a different view?

Mr Brown : Right through that time there were differing views around the industry and in the ATO. In one office in the ATO there were clearly differing views, so we took the most conservative approach at that point and filed conservatively.

Mr TONY SMITH: You were able to pinpoint something quite specific there. Can you be as specific on the other views that were put to you and that led you to take a conservative position and to realise that in fact there was a great deal of doubt about this?

Mr Brown : There was a letter from the department of resources at the time to BHP, our co-venturer. So that is—

Mr TONY SMITH: I am not expecting you to have word-perfect recall on—

Mr Brown : That is the other view that was put.


CHAIR: That leads to my first question. The evidence says you have been in dispute since 1990, and I am just trying to get a clear picture of what 'in dispute' means. The first time you filed was in 1994?

Mr Brown : That was really on the timing—the three-year rules that applied to the PRRT Act after we had filed our return.


CHAIR: So you could not file—

Mr Brown : We could have, but we just—

Mr TONY SMITH: I see, yes.

CHAIR: Is it—

Mr Brown : At that stage there were a number of issues in dispute between us and the tax office. This was one of the minor issues initially.

CHAIR: That was going to be my second question—is it normal for Esso to be filing and be in dispute with the tax office on a whole range of issues, or is this a special one?

Mr Brown : No; this is standard practice.

CHAIR: So being in dispute with the tax office since 1990 is standard practice?

Mr Brown : No; we are a large taxpayer, and we have had disputes on PRRT and income tax issues throughout my time with ExxonMobil.

CHAIR: Would we be having this same discussion about any other changes to the law that the federal government wanted to make if you had been arguing with the tax office—

Mr Brown : I think the issue here is the changes going back to 1990. If the change was dated today or 10 May there would be no issue—we would not be here.

CHAIR: Okay. You said there is a fiscal risk in going back to 1990. I cannot see that. Can you explain to me? You have actually been paying the tax as the ATO has interpreted it. Is that right?

Mr Brown : That is right, and if we win our appeal we get a large refund.

CHAIR: Okay.

Ms O'DWYER: This goes to my question earlier to Treasury: what is the quantum we are talking about here? Can you give us a—

Mr Brown : This is a complex area, as Treasury said, on what the final position could be. Our numbers would say that the maximum refund for the taxing point dispute for 1991 to 2002 is around $323 million. That is our share.

Mr Dashwood : To give it complete context, over the whole period we have paid approximately $6.3 billion in PRRT. The dispute is about five per cent of that value.

CHAIR: When did you file the appeal.

Mr Brown : The appeal was filed in 2004.

CHAIR: No, the decision was made in April.

Mr Brown : We filed the appeal in May this year.

CHAIR: No date?

Mr Brown : It was after the budget.

CHAIR: Okay. So the government had announced that it was going to change the law before you appealed?

Mr Brown : That's right.

CHAIR: It's not that there was an appeal in process and the government has now—I'm just wondering about your statement that the government has sought to circumvent the legal process.

Mr Brown : I think the government would have been quite certain that we would appeal—there would have been no doubt within the mind of the tax office.

Mr TONY SMITH: Have you, essentially, given notice? Is that your point?

Mr Dashwood : The appeal period, the time between when a judge's decision comes down and the time you have to file an appeal, was open when the Treasurer made his announcement. Subsequent to that we and the ATO have filed appeals against various aspects of the judgement.

Ms O'DWYER: I think that is an important point to make. There is an appeal period during which time, at any point, a taxpayer can appeal a decision. I don't think we can read too much into it. I was looking at the Business Council of Australia submission, which says that the retrospectivity of the potential changes where there is an ongoing dispute between the government and an individual taxpayer would create a very poor precedent. Are you aware of any other examples where such legislation has been brought forward? Are you aware of any other precedent?

Mr Brown : No.

Ms O'DWYER: Mr Dashwood, in your opening statement you talked about the amount of tax that's paid, the project and employment. I want to be clear in my understanding: in making those statements, is there any suggestion that, if the government was to make this legislative change, there would be any threat to employment or to the project as it currently stands?

Mr Dashwood : The retrospectivity that we're talking about deals with the past—what is done is done. The contribution that has been made in the past won't change. It could affect the way investments are viewed looking forward in the broader sense not just in the Bass Strait project, I'm talking Australia wide.

Ms O'DWYER: So that I understand it from your perspective, would it change your perspective on your investment decisions? Leaving aside everybody else and how they view the decision, I'm asking specifically how it would factor into your decision making.

Mr Dashwood : In particular, it affects my competitiveness with my affiliate peers around the world when we're competing for shareholder funds. If I put myself in my shareholders' position and look into Australia for the two years I've been in the job, I see that resource taxation has a vector that has been increasing, carbon taxation has a vector that is potentially increasing and the foreign exchange rate has a vector that's been moving in the wrong direction. This retrospectivity would be another vector moving in the wrong direction. These decisions are multi-issue decisions. It could contribute to the way in which investments are perceived in this country.

Dr LEIGH: Mr Dashwood, you have spoken about Esso's need to maintain its competitive position in the world. Any windfall gain that accrued to Esso would improve your competitive position, would it not?

Mr Dashwood : I do not understand what you mean by windfall gain.

Dr LEIGH: Any instance in which Esso were to find itself in a surprisingly good financial position, because of a change in the price of the product you are selling or a change in the tax regime, or an unexpected win in a court case would improve competitive position.

Mr Dashwood : Our competitive position is determined by how the fiscal environment and how the cost environment in the various countries that my organisation might operate in and compares with that of our competing companies and competing countries.

Dr LEIGH: Indeed, but windfalls are good for Esso Australia regardless of where they come from, surely?

Mr Dashwood : There will always be a pursuit by business of certainty, stability and clarity around the fiscal regimes in which they operate. They need to be competitive when looked at across the world.

Dr LEIGH: Let us go to that issue of certainty. There seems to be some difference between you and Mr Brown regarding the question of the parliament's role in passing legislation in this context. If I understood Mr Brown correctly, he seemed to be saying that his concern was over retrospectivity. In your opening statement, you said that parliament should not usurp the role of the judiciary, which seemed to suggest that the very fact that the government had passed legislation during a period when a taxpayer could appeal was in itself wrong, absent any retrospectivity. Is that your position?

Mr Dashwood : Yes, in short. To be clear, the two issues are very much intertwined in this particular instance. By making this retrospective, de facto it steps on the very matters that are under appeal in the Federal Court action.

Dr LEIGH: Let us go then that precise issue. Your argument is that this would be problematic even if it were not retrospective because you argue that parliament is usurping the role of the judiciary. The Treasurer announced legislation during a period in which the government had won a court case and no appeal had been filed. That strikes me as analogous to a situation in which a taxpayer has mounted an action at first instance. Is it then your argument that the government should not change any law which is under challenge by any taxpayer?

Mr Dashwood : If there was no retrospectivity in this legislation then it would not touch upon the matters in front of the Federal Court at this point.

Dr LEIGH: That is different from what you said before. Before you argued that, even if the matter were not retrospective, it would be problematic.

Mr Dashwood : I do not believe I said that and if I gave that understanding that is not where I was. I was really pointing the committee towards the retrospectivity as the piece that concerns me.

Dr LEIGH: The argument about parliament usurping the role of the judiciary surely falls. What matters is not the timing and is not the fact of court cases happening or not happening, or pending; what matters is the question of what you call retrospectivity—is that right?

Mr Dashwood : That is the primary issue we have and its effect is to override the role of the judiciary, in our case.

Dr LEIGH: I think it is important that we keep these issues conceptually distinct. A piece of legislation can be retrospective or not. That is utterly distinct from the question as to whether court actions are mooted or on foot. You have just stated to me that your sole concern is retrospectivity not whether or not court case is pending.

Mr Brown : Our concern is retrospectivity because there was a court case pending. If this went back to 1990 and all our assessments had been upheld, the ATO would have been able to tell them that they could not change the rules and we would not be here. The issue is that, because this is still open and we have a court case pending, this law goes back and tries to potentially change the result of those court cases.

Dr LEIGH: But it does not do that, with respect, Mr Brown; it reaffirms the result of a court case.

Mr Brown : It means that, if we were successful on appeal, that can be overturned by the parliamentary process.

Dr LEIGH: Your position, if upheld, would place the government in some jeopardy pretty much anytime we wish to change legislation. If the concern is that the government should step back in cases where legislation is afoot, that would make it very difficult in practice for governments to change tax laws in a way that reaffirmed past interpretations of the law.

Mr Brown : I think you will find that it is very rare for the parliament to change a tax law going back five years. To change a tax law going back 20 years is extremely rare, and when a law is changed it is normally around a specific anti-avoidance issue; or, in the case of consolidation, which was mentioned by the Treasury people, most of those changes were for the benefit of taxpayers where there was uncertainty. So retrospective changes are, as a general practice, either against anti-avoidance matters or to the benefit of taxpayers.

Dr LEIGH: This is not precisely an anti-avoidance matter, but Treasury certainly argued before us that a profits based tax of its nature would determine the price at the point of sale. They argued that to do otherwise would lead to complicated net-back arrangements and that profits based taxes of their nature have sale price as the relevant MPC.

Mr Brown : I just make the point that the exposure drafts of the MRRT legislation had a completely different position. The taxing point is just after the mine, a long way from point of sale.

Dr LEIGH: I accept that is true of the MRRT; that is certainly not the way in which the PRRT has been envisaged and interpreted.

Mr Brown : I also make the comment that our biggest revenue stream from PRRT is crude oil. Our taxing point of crude oil is not where we sell the crude oil; there is a net-back for the pipeline.

CHAIR: You were talking about the retrospectivity as impacting on your future investment decisions. Can I make it clear, though. You have been operating now since 1987 with the PRRT as it has been interpreted, so that interpretation itself—

Mr Dashwood : That has been interpreted by the ATO.

CHAIR: You have been paying that tax as the ATO interpreted the law for that period of time. So the PRRT itself did not impact on your investment decisions?

Mr Dashwood : When the PRRT came in, the investments had mostly been made in the project as it existed at that time.

CHAIR: You were saying that if this bill goes through it would impact on your future investment decisions. Once the PRRT came in and you were paying the tax according to the ATO's interpretation all those years, did the PRRT itself impact on your future—

Mr Brown : I can comment on that if you wish. Some comments were made earlier that when the PRRT came into effect on Bass Strait there was an agreement or that we were beneficiaries of that—it was a positive change for the project. This is a quote from the then managing director of Esso Australia, John Schubert: 'This is an inequitable change in the rules introduced after we have invested billions of dollars on exploration and development in Bass Strait with expectation that the rules would not be changed adversely. Esso has been working in Bass Strait for more than 25 years and we are now looking ahead to another 25 years with a view to maximising the recovery of the area's oil and gas. But the near-term advantages of RRT are significantly outweighed by the longer term increase in government take under RRT. This has been an adverse, radical and arbitrary change to the rules governing Bass Strait, making it difficult to plan for new developments with confidence.'

CHAIR: So it did impact on you.

Mr Brown : There were certainly—

CHAIR: In that case, a tax change caused your investment decisions to—

Mr Dashwood : I have not gone back over the last 20 years since PRRT has been in effect and looked at what might have happened under a different regime. It is the regime that exists at the time and it is the law and you make your judgments based on the law at the time. It is the reaching back and rewriting of history that is troubling. If you cannot be certain of the regime you are going to be operating in—it takes us three to five years to define a project, a couple of years to build one and then a good number of years to operate it—you are looking for some certainty of that program.

CHAIR: That is the point I need you to talk to me about. You say it is a rewriting of history the way it is operated. The way I look at it, it is not a rewriting of history in the way it operated, it is a rewriting of history in the way that you wanted it to operate. I cannot see that retrospectively. I need you to explain that to me.

Mr Dashwood : It is a recasting of the risks that were perceived at the time you made the investment in the first place.

CHAIR: Because you assumed from 1990 that you would win the case.

Mr Brown : We have always assumed there is a reasonable chance we would be successful.

Mr TONY SMITH: It is an important point of clarification for us. Perhaps if we approach it another way. If we go back to the evidence of the Treasury, their evidence essentially was that the act was passed in 1987. From their perspective it was clear. That was the intent of the second reading speech, that we did not have before us but the explanatory memoranda from the time was quoted. I think you referred to something in early 1992 and you made a good point that there is a natural lag in all of these things; it is not like income tax being earned in a single year. In your evidence you said the tax office, you quoted an official from the time, was essentially the basis for your case on the taxing point. Are you are able to point to anything from the legislative debate itself?

Mr Brown : I can give you submissions on the whole argument.

Mr TONY SMITH: This goes to the crux of your interpretation. I am interested in whether it was your interpretation from day 1 when the legislation came in—not you personally, because I do not expect you were there at the time—or whether this became your interpretation as a result of consultations and discussions with the tax office. I fully appreciate that you will not have all that with you and you will need to provide it to the committee. I just wanted to give you the opportunity because the witnesses before you are able to refer to the explanatory memorandum. The matter really is: at what point did you adopt this view? It is a factual question.

CHAIR: You were saying you thought from day one that there was a chance you might win. I want to deal with the time from 1990 to 2004 when you took it to the courts. You said before that it was standard practice to be in dispute with the tax office over a whole range of issues. Up until that point, is there something different about this dispute with the tax office that should make us think you believed the world would turn out differently compared to all the other disputes you had with the tax office?

Mr Brown : I think we always thought that we had a good case and we had advice from the start of the PRRT that this was always going to be an issue. But there were a number of issues around the application of PRRT to Bass Strait that had to be resolved, initially. And the first focus was on the most valuable product stream, which was crude oil and how you value crude oil. That was the biggest dollar-value dispute.

Mr TONY SMITH: Your point is that the legislation was there but there needed to be consultations and discussions and I presume rulings around Bass Strait specifically.

Mr Brown : There were no ATO rulings until more recent times but we had discussions and I suppose a process of negotiation to try to work out—

Mr TONY SMITH: Interpretations.

Mr Brown : how to value crude oil. That was the first issue. There were other issues around what costs were deductable and all this time the sales gas issue was going on. Especially in those early years, the value of sales gas was very low; the gas price was very low. So the revenue at stake, looking at the whole scheme of things, was not that big. We quote that our total payments in the year 1991-92 were $6.3 billion and we are only talking about $323 million here, so it is a relatively small amount of the total payments.

Mr TONY SMITH: The legislation went through; then Bass Strait was an issue. At that point you were obviously involved in detailed discussions about how this is going to work. Is that right?

Mr Dashwood : Yes, and we have to meet PRRT payments on a rateable basis. You file a return based on those PRRT payments and what you believe is the right set of circumstances and then the ATO either gives you a notice of assessment or tells you that it objects to something or that 'this isn't right'. I suppose the first document, the first formal taxing point objection on our part, absent a whole lot of discussion between us and the tax office, was in 1994. So this has been an issue from the very beginning.

Ms O'DWYER: I would like to clarify that. I want to pick up on a question asked by my colleague Dr Leigh when he talked about 'windfall gains'. I think it is an interesting characterisation of an amount that might be in dispute, because you are in dispute with the Australian tax office as to the taxing point and it is described as a windfall gain. I presume you would not characterise it like that. You would not see that the amount that is in dispute is somehow, if it falls in your favour, a windfall gain, because it is an amount that has been in dispute from day one.

Mr Dashwood : We start from the place that says we want to pay tax in accordance with the law, whatever that is. If we and the ATO have a different perspective on what that is, there are processes for dealing with that. The 1994 objection I talked about, which took exception with the taxing point issue, was actually referring to the 1991 return. So from the very, very beginning this issue has been on foot.

Mr TONY SMITH: Essentially, whilst it is 1994, people should not be confused. It relates probably to the earliest possible point.

Mr Dashwood : That is right.

Mr BUCHHOLZ: That goes to my question about the time when the $320 million liability was incurred. Can you reiterate what happened subsequent to that? Was it a $6.3 billion tax?

Mr Brown : There was $3 billion of total tax paid by Esso for the period from 1992 to 2002. That is PRRT only.

Mr BUCHHOLZ: What was that period?

Mr Brown : From 1 July 1990 to 30 June 2002.

Mr BUCHHOLZ: I was trying to pick up on your opening comments, John, about the $2.2 billion tax liability and I could not work out the $6.3 billion.

Mr Dashwood : That is an annual number for PRRT and every other tax that we pay as well. It includes excise, GST and the whole lot.

Mr BUCHHOLZ: What other taxes do you pay, including royalties, for the product, for the oil?

Mr Brown : Income tax and PRRT. There is no royalty in that. The PRRT replaced the royalty.

Mr BUCHHOLZ: That is it, the $2.2 billion. What percentage of your turnover is that? What are you paying for the product?

Mr Brown : The effective tax rate on Bass Strait production, if that is what you are after, combining PRRT and income tax, is 58 per cent.

Mr BUCHHOLZ: If the planets line up for you and you get the outcome you want, what are the potential effects that you think the Treasury or tax office liability will have on other stakeholders or partners that may have an interest in Bass Strait or throughout your industry?

Mr Brown : The issue is exactly the same for BHP, with 50 per cent interest in the project.

Mr BUCHHOLZ: So we could just double what your potential liability is. Anyone else?

Mr Brown : No. Our understanding—and this was said yesterday in a hearing of the Federal Court in relation to this matter—is that there are no other Federal Court disputes on this issue. Our understanding from APPEA is that there are no other taxpayers in the industry where this is an issue.

Mr BUCHHOLZ: Can you give me an idea of what impact this bill would have on newcomers to the market, given that the liability issue is, from what I can work out, about what is deductible and what is not? Would newcomers to the market have a whole ramp-up cost? Would they be disadvantaged or advantaged if this bill were to be successful?

Mr Brown : If we are looking at the bill as a whole, I think the effective date to 1990 only has application to Esso and BHP. Our understanding is that it has no application to anybody else. The change prospectively will clarify the existing interpretation and people will make the investment decisions regardless. The thing to remember with PRRT is that, for new projects, where the taxing point is in the end is not a key aspect in the economics of the project, in its fiscal take—the way the design of the tax works.

Mr Dashwood : Perhaps the more relevant consideration for a new investor who has not been in this industry before, or who finds a new resource, would be that they will have a new set of rulings, guidelines, court findings, that will prescribe how the tax works, so that helps them. To the extent the retrospectivity stays in this, though, it will become part of their assessment of the political and economic risks inherent in doing business here.

Mr BUCHHOLZ: What do you see as the greater risk, this or the MRRT? But you are exempt from that anyway, aren't you? You will not get picked up by it?

Mr Dashwood : I cannot speak about MRRT, because it does not apply to my business right now.

Mr BUCHHOLZ: Of course. Disregard that.

Mr STEPHEN JONES: This committee has a number of functions, one of which is that we have a regular interrogation of the Reserve Bank governor and his offsiders. At each of the last three or four of those that I have attended, the governor has impressed upon this committee the pressure on the Australian economy that is a result of the massive pipeline of investment in the minerals and resources industry—the pressure on interest rates, the flood of capital into the resources sector, on the labour market and a range of others. Against that background, can you understand why someone like me who sits on the committee might be a little bit sceptical about some of the comments you are making about sovereign risk and the risk of capital flowing out of the country from the resources sector because of a piece of legislation affirming what we have always understood the force of the law to be?

Mr Dashwood : When we talk about a resource pipeline and investments that are on foot and say that there is a very optimistic mood, that might very well be right in today's circumstances, in today's fiscal and economic environment, but resource projects in general tend to be so large that they take many years for the investment, the construction and the actual setting-up of the operation to take place. Once you hit the 'go' button, it takes that number of years before you have a producing entity. If you are a third of the way through that investment and someone changes the rules, someone changes the tax environment, you have two choices: you keep going, on the basis that going forward and actually starting the operation up is better than stopping and writing off all the investment that you have made, or you stop. Once people have hit the 'go' button, you will find that these investments will keep getting made, but, just like in the tax return aspect of this, there is a lag in the investment confidence here. So the rule you make today will affect decision making about projects that may not start for another two or three years, which then have a four- or five-year investment ramp-up. So there is a substantial lag in this. I cannot sit here and tell you that, as a result of making one law change today, tomorrow doomsday will happen. It just does not work that way. But the setting in which people will view investments going forward will be different. That is what we are trying to say.

Mr STEPHEN JONES: The second point I want to raise with you is that the petroleum resources rent tax is called a tax, but it is effectively, in layman's terms, the price you pay for accessing a raw material, isn't it?

Mr Dashwood : It is a fiscal bargain between the government and the business.

Mr STEPHEN JONES: That is right. That is the price that you pay and everybody else in your business pays to access the oil that lies under the Bass Strait or wherever else it might lie so that you can then process it and change it, and the prices that most producers pay change over time. I was quite impressed with the submissions you gave us about the amount of tax you pay and all the rest of it. That is very good, but this is actually a price for a raw material. The legislation that we are talking about here today affirms what every other producer in the country and five successive governments have understood to be the force and effect of that legislation. Against that background I find it a little bit difficult to accept that this has somehow blindsided you guys, that you have been taken unawares by the fact that the parliament might seek to affirm what we have always understood to be the way the legislation operated.

Mr Dashwood : I do not take exception to your statement that the PRRT is a fiscal bargain between the government and business for the development of non-renewable resources. I do not have any qualms about that, but the retrospective aspect of it essentially seeks to change that bargain—

Mr STEPHEN JONES: This is where we disagree, Mr Dashwood. The term 'retrospective' is what we disagree over. Every other producer and investor in the country, five successive governments, the tax office and the Federal Court all understand the operation of that provision of the law to be as is proposed within this bill. So how is that retrospective?

Mr Dashwood : I would submit to you that the two that are mostly impacted and that have paid most of the PRRT over that time have not been in that place.

Mr Brown : I make the point that up until 2007 $22 billion had been paid in PRRT revenue and $20 billion of that came from Esso and BHP out of Bass Strait. Most of the revenue from the tax at stake comes from the people affected by this decision. Most of the taxpayers in other areas are oil projects, not gas projects. So it really is—

Mr STEPHEN JONES: Gentlemen, I make no criticism of you attempting to minimise the amount of tax you pay. I make absolutely no criticism of you. On the other hand, I do find it a little bit difficult to accept this construction of the bill as retrospective when five successive governments, the tax office and the Federal Court have all thought that it operated in the way that this bill proposes. Perhaps this is a matter on which we will eternally disagree.

Mr Dashwood : Over that same period, we have been seeking to resolve that dispute with the tax office through the various judicial channels. All we are saying is, 'Why not let that run its course?'

CHAIR: Does Esso have any other disputes running through judicial channels? Between 1990 and now, have you had other disputes running through the courts?

Mr Brown : We currently have one other dispute in the court at the moment on PRRT and that is to do with deductible costs.

CHAIR: Have you had others over that period?

Mr Brown : There was an issue around the taxation of the pass on. It is a complicated and very narrow issue. We have had other issues.

Mr Dashwood : Are you talking about disputes with the tax office or disputes in general?

CHAIR: I mean with the tax office in the courts. So there have been three.

Mr Brown : There have been three.

CHAIR: I am really trying to understand your statement that it is retrospective because I have some issues with it myself. I am just going to go back to where I was before. You have a range of disputes going on with the tax office about a whole range of issues and that is standard practice.

Mr Dashwood : I do not know that it is standard practice to have a range of disputes. I think we all do our best to comply with the law, as we understand it. If there is a difference in understanding—

CHAIR: Those were your words, not mine.

Mr Brown : The PRRT was a new tax and it is a difficult tax to apply because it is not taxing the income of a company; it is taxing part of the income. So there are always going to be issues around the boundary of the tax. That is what we have been dealing with over the past 20 years.

CHAIR: Between 1990 and 2004 when you were working out some things to do with oil, which is about 14 years, I think you also said that at that time the revenue was less. So when the revenue started to become much greater you focused on it.

Mr Brown : It is not quite that way. We focused on one issue and then we moved to the next issue. In that time, yes, the revenue did grow. But it was not because the revenue grew that we moved. It was because we resolved one and then resources moved to dealing with the next issue.

CHAIR: You did say earlier that as a business you tend to put your priorities where the revenue issues are greater.

Mr Brown : The tax office, as well, is putting its priorities on those issues because that is where the most revenue is at stake.

CHAIR: So you both do it?

Mr Brown : Yes.

Mr Dashwood : But the taxing point objections were being failed every year with every return. It was like nothing happened between 1994 and 2004.

CHAIR: I understand that. Again, I am just trying to see whether this one is just part of the standard practice. Did you file lots of other objections with the tax office?

Mr Brown : There were four or five issues on which objections were filed, and they have been filed consistently.

CHAIR: So as well as this one there are four or five others on which you have consistently had disputes with the tax office for about the same period of time, but they have not been to court?

Mr Brown : They are in court at the moment. We have two appeals in the Federal Court in November. One touches on this issue and another one touches on separate issues. In the case we have before the Federal Court that includes this issue there are also two other issues.

Mr BUCHHOLZ: What is the success rate with appeals?

Mr Brown : In the appeal that is before the Federal Court on the taxing point issue there were four issues in dispute. We won two and the ATO won two.

Mr BUCHHOLZ: Not bad.

Mr Brown : In the other case, we won one and the ATO won one. There were two issues in that one.

Mr BUCHHOLZ: So it is a flip of the coin!

Mr Brown : Yes.

CHAIR: Thank you for your evidence. If you have been asked to provide additional material would you please forward it to the secretary. You will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact.

Is it the wish of the committee that the document entitled Petroleum resource rent tax: an overview of the legislation with questions and answers presented by Mr Stuart Brown of ExxonMobil Australia Pty Ltd be taken as evidence and be included in the committee's records as an exhibit? There being no objection, it is so ordered.