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Mining taxes

CHAIR (Senator Cormann) —I declare open this second hearing of the Senate Select Committee on Scrutiny of New Taxes. Today’s hearing will inquire into the government’s proposed minerals resource rent tax and expanded petroleum resource rent tax. These are public proceedings, although the committee may hear certain evidence in camera. The proceedings are governed by rules set by the Senate, copies of which have been given to the witnesses. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. I remind members of the committee that the Senate has resolved that public servants shall not be asked to give opinions on matters of policy.

I now welcome Dr Alan Moran from the Institute of Public Affairs to the hearing. Would you like to make a brief opening statement?

Dr Moran —Thank you. The submission which I have made on behalf of the Institute of Public Affairs covered two facets of this committee’s work. One was the resources rent tax and the other was the various carbon tax proposals.

CHAIR —Thank you very much for a very detailed submission; we really appreciate that.

Dr Moran —I have some supplementary information which I have given to the secretariat here, particularly covering the carbon tax proposals. I will just make a few brief comments on both aspects, if you will bear with me. First, we have the resource rent tax, which is targeted at the sector of mining, which as I guess we all know has spearheaded Australia’s prosperity. Mining activity has in recent years faced increased obstruction with matters like more intensive environmental approvals, access to national parks, native title et cetera. There are some suggestions that now something like 20 or even 40 per cent of Australia is, if not off limits, more difficult to prospect into.

Profits-based mining taxes are quite common around the world—indeed we have one in the Northern Territory here—and they do have some advantages, but the RSPT and the MRRT really are based on increasing the taxes on mining activity, and in doing so, in our view, this highly discriminatory tax which is imposed will mean that exploration shifts to greener pastures.

According to the tax office, mining companies are not low taxpayers under the existing regime. Their effective rate is about 28 per cent; that compares to 25 per cent for all industries. Including royalties, mining pays about 41 per cent. The first stage of mining is, of course, exploration, and Australia’s share of world exploration activity is quite high. It has historically been around 17 per cent; it has dipped a little in recent years and would certainly fall further if the tax regime became more onerous. I think that in this respect the comments of the Canadian Minister of Finance when the PRRT was announced are quite illustrative. He said:

If it is what it appears to be, a significant tax increase, that’s another competitive advantage for Canada. We’re reducing our corporate taxes.

So, even though the taxation arrangements planned under MRRT are less onerous than RSPT—although they are not fully known at this stage, of course—the tax rates will, I think, be considerably higher in Australia than in major nations with which we are competing. We can see no case for an increase in taxes on mining and we consider that such measures would detract from future activity and hence from national prosperity.

The second aspect of our submission covers the various carbon abatement measures which have been planned or are in place. The two which have gained the most prominence, I think, have been the 20 per cent share for renewables by 2020, which is the law already, and the prospect of a carbon tax or cap and trade regime. The 20 per cent share for renewables by 2020, which is the law at the present time, will impose a cost of about $4 billion per year. That cost would be imposed even if the 45,000 gigawatts went to the lowest cost exotic renewable, which is wind; it would be much more if it were other renewables. Wind is about three times the cost of coal based energy. That 20 per cent—

CHAIR —I will just interrupt you there. I assume that the secretariat has advised you that today we will deal with the mining tax specifically—

Dr Moran —Okay.

CHAIR —and we are going to be dealing with the carbon tax at a separate time. Have you made all your comments—

Dr Moran —Okay, that is fine. That is basically—

CHAIR —In relation to the mining tax?

Dr Moran —In relation to the mining tax, yes.

CHAIR —Okay. If you do not mind, we might just proceed with some questions. I ask everybody this question because I go back to the beginning of where the Henry review was supposed to start, which was a root-and-branch reform of our tax system giving us a simpler, fairer tax system. Do you think that what has been put forward by the government has delivered a simpler, fairer tax system?

Dr Moran —In terms of the mining tax or proposal? We actually do not know, at the present time, what the government’s final proposals are likely to be with the MRRT. Certainly we do know in terms of the RSPT that this was a very big increase in taxation. The aspect about it—fairness or whatever else—is efficiency in a lot of ways, and that is the most important aspect. If in fact we have a taxation regime which is significantly more onerous than that of other competitor countries, obviously we will have less activity. We have no monopoly on any material. We have a lot of fine resources in Australia, but there is no monopoly.

CHAIR —But simplification in Henry’s mind was that a national tax would replace state royalties, and of course that is now not happening. The proposal is now for there to be a national mining tax alongside state royalties, with state royalties to be refunded up to a certain level and future increases not being refunded, so we are going to end up with two regimes in parallel to each other. Do you think that is simpler?

Dr Moran —I think that obviously it is not simpler. Indeed, you can get into an impasse there, as the Canadians did some 20 years ago when they had state and federal taxes. In fact, at some stages they had a tax rate of over 100 per cent in some provinces as a result of that. It can get to be very complex. Also, of course, the simplification, the purity, with what was proposed with the PRRT was one tax et cetera. Now we have a tax which is confined to only two minerals, coal and iron ore, so it is actually a lot more complex. Certainly, in terms of the elements of substituting a royalty’s based tax for a profits based tax, it has got some merits. They are not unabashed merits, but there are some merits in doing that. If that were all that were proposed, I think that there would be far less—there would be very little—opposition to it. Indeed, I think some major companies have suggested that that would be a good idea.

Senator HUTCHINS —Your submission suggests an element of supporting the replacement of royalties with another sort of tax.

Dr Moran —We think that a profits based tax has some merit in it. It does have some demerits as well, but it has some merits, insofar as a depleting mine can be continued for somewhat longer than if it was subject to a royalty based tax. In fact, a mine that is relatively low value in the first place could get ahead with a profits based tax. If it were simply substituting a profits based tax for a royalty regime, I do not think there would be very much opposition to that globally or anywhere. Indeed, some companies would see it—

0Senator Hutchins interjecting

Dr Moran —Then, of course, in a lot of ways it is a wolf of more tax dressed in sheep’s clothing of more efficiency.

CHAIR —Just going back to your comment earlier, you said that it is only applied to iron ore at the moment, which you say adds to the complexity. Taxation is supposed to be neutral in terms of impact on investment and so on. How do you think the feature of the tax such that it only applies to iron ore and coal is impacting on the concept of neutrality—that it should not alter positions on investment, production and trade?

Dr Moran —I think it would alter those investments because there will always be a difference in the tax equivalent of a measure imposed on one mineral, if it is a different measure, even if it is supposed to be designed to have the same effect on other minerals. So there will be a disneutrality there. The bigger aspect of the neutrality, though, I think, as Senator Hutchins has suggested, is that it will be raising more money. The case for raising more money from a particular activity has the real impact on creating these non-neutralities and distortions within the economy.

CHAIR —It is doing that for iron ore and coal. The resource rent tax has been abolished for all resources, with the exception of iron ore and coal, and then there will be an expansion of PRRT onshore. Is it going to create a distortion for iron ore and coal compared to the other resources?

Dr Moran —Presumably it will increase the tax on iron ore and coal and, if it does, it will create a distortion against those and for other activities, but we do not know the detail of the tax. The fact that three of the large companies have given some support to that tax indicates that they have seen some more detail on it which possibly leaves them better off.

CHAIR —There are questions in relation to this. The three companies that have given some support, as you say, are multi-commodity, multi-project companies. BHP has nickel, uranium, iron ore, coal and heaps of other resources, including copper. They have had the resource rent tax abolished for a lot of resources as well as having agreed to pay it on some resources, whereas you have FMG, Atlas Iron and BC Iron who are purely focused on iron ore. They cannot escape the tax anywhere. Do you have some sympathy for the small- to mid-tier iron ore companies that are a bit aggrieved by having been excluded from the process?

Dr Moran —Yes. They are locked into Australia and locked into mining generally, whereas BHP, Rio et cetera are not Australian companies; they are global companies and are relatively indifferent to where their new investment comes from. It seems, looking at some of the analysts reports—and they do not have the full information about the depreciation provisions and that sort of thing—that those three big companies are lightly hit, if not hit at all, by the proposals. There is discrimination there. One of the interesting aspects of that discrimination is the support that Marius Kloppers gave to the tax, suggesting that it should proceed as it is. That support was given in the context of him also supporting a carbon tax of some sort. To BHP, that says to me that this tax is quite a bonanza in the way it is structured, and why he wouldn’t he support it?

CHAIR —You are from the Institute of Public Affairs, so you take a view on the way public policy processes should work. As far as a best practice model goes for developing a tax, what is your assessment of a government sitting down with three taxpayers and excluding all of the other taxpayers from the discussion, designing a tax in a closed room and then not sharing any of the information afterwards on the assumptions that were used to come up with the features and the revenue estimates?

Dr Moran —That certainly is not a very good model to operate on. A company chairman, a CEO, only has one goal, which is to maximise the wealth of his shareholders. If that means crawling over other people and disadvantaging other people, then he will do so. If you have that very—

CHAIR —That is an important point. I understand that BHP, Rio, Xstrata and so on would act in the best interests of their shareholders as they see it, but what about the position of our national government? Shouldn’t they be acting in the public interest?

Dr Moran —Of course, and possibly they thought they were. In terms of consultation with just three companies which have very different structures and very different interests from the industry as a whole, that will only give a partial result and it may be a highly distorted result.

CHAIR —Do you think that what has come out of the negotiations between the government and the three big mining companies has given them a competitive advantage compared to the remainder of the industry?

Dr Moran —It certainly has at the present time. Perhaps the government in its present review is trying to correct that.

CHAIR —Do you feel it has enough scope to do that in its current review? The evidence we have had from those small to medium miners is that the terms of reference are very narrow. There is a prescription that any changes have to be revenue neutral and, of course, they are not allowed to change any of the principal features of the tax. Do you think that the present review has enough freedom and scope to be able to address some of the fundamental flaws?

Dr Moran —We would have to cast doubt on that. Some of the issues seem to be locked in and some are not. But, yes, there is a pole position given to three companies in there and they—

CHAIR —Is that fair?

Dr Moran —No, it cannot be fair and it probably is not good practice anyway.

CHAIR —Alan, you described them as global companies. Australian companies were outside, locked out, and the global companies were in there negotiating with our government. It seems like a strange process to me.

Dr Moran —I would have to agree.

CHAIR —The revenue estimates from the tax have bounced around somewhat. It was $12 billion for the RSPT in the budget. Then, to facilitate the deal, commodity price, production volume and exchange rate assumptions were changed to the point where the original tax would have raised $24 billion. The revised figure was $10.5 billion. Now the exchange rate assumptions have been changed again and it is $7.4 billion. Do you think that a government that relies on revenue from the mining industry ought to be transparent about the assumptions they are using to estimate their revenue?

Dr Moran —Yes. We said something about that in our submission. They were just not credible. There were massive changes triggered between the original proposal and the MRRT. It was not credible that that was only going to cost a couple of billion dollars, and that has been borne out as things have gone by.

CHAIR —Sure, but I am looking again at the best practice from an openness and transparency in the public policy development point of view. The state government in WA publishes their commodity price, production volume and exchange rate assumptions in the budget papers so that, when there are different budget outcomes to what was estimated, people scrutinising the budget can assess whether they are due to changes in any of these variables or whether they are because of decisions made by the government. The Gillard-Swan government have refused to do that. They have refused to release commodity price, production volume and exchange rate assumptions. Do you think they should? It obviously bounces around, based on these assumptions, but do you think it would be important from an openness and transparency point of view to have that information on the public record?

Dr Moran —I think it is hardly ever not the case. Having information on the public record is always the best practice. There may be some cases where it is commercial in confidence, but it would not appear to be the case that, when we are talking about an aggregate tax on the whole of industry, that is not commercial.

CHAIR —Do you think that BHP Billiton, Rio Tinto and Xstrata would have shared commercial-in-confidence market-sensitive information with the government as part of their negotiations?

Dr Moran —I think they would have given their opinions, and maybe they would have been candid and accurate opinions, about where the trends were moving in terms of prices et cetera. They have more expertise, I guess, than the Treasury.

CHAIR —So are you saying that the government might have negotiated with people who had an interest in the design of the tax, taken the opinion of those people who had an interest in the design of the tax as to the underlying assumptions and then just taken that at face value?

Dr Moran —Not necessarily, to somebody, at face value, but I think it would been heavily influenced by those considerations, yes.

Senator HUTCHINS —I am going to contest some of your conclusions. The latest ABS capital expenditure figures show that mining companies are planning to increase their capital expenditure by 50 per cent in 2010-11 to $55 billion. That is this year. I will continue on and I will ask you to respond. The Australian reported last week that Australia’s small and junior miners are on track to raise well over $4 billion in 2010-11 to fund projects, including domestic plans. The Financial Review reports that small and junior mining companies in the mining and energy sectors have raised more than $650 million from Australian and international investors in September. The Australian reported in October that FMG has plans to raise over $2 billion in coming weeks to finance expansion plans. That does not suggest to me, Dr Moran, that the small and junior mining companies, let alone the industry, are being all that impacted by this new tax.

Dr Moran —There is certainly a great deal of activity and demand activity generally in the world, and that is driving forward expenditure. It is incontestable that placing a tax on something will eat into the profits and reduce the activity from what it would otherwise be. I am not suggesting that we have adopted a Third World tax regime of total expropriation—no, we have not. We have very good laws here. But any increase in taxation provisions must have an effect of reducing activity compared to what it would otherwise be. You have to look at the counterfactual there. FMG and others are moving ahead very strongly—and why wouldn’t they; the Chinese iron ore demand is increasing considerably. If we do impose additional financial obligations on firms, there must be less activity; there cannot be any other answer.

Senator HUTCHINS —If the demand is not there. I suggest that in the next 20 years the demand will be there—we have been advised—whatever the tax is. We would not agree on that. I am just saying this is contestable. Can you elaborate on what I would call an eccentric statement, on page nine of your submission, relating to the ‘fallacious basis that mineral deposits are owned by the people’—from? Why would you say that anything under the ground is fallacious and should not be owned by the people? It is an established right that we do. That is why it is called royalties, isn’t it. Because it is owned by the Crown.

Dr Moran —There is a whole history of royalties which you probably know almost as well or maybe better than me. But the point about a new discovery of minerals or any new innovation—a Microsoft or whatever—is that it does not exist until it is actually discovered. There are minerals all over the world. Afghanistan is said to have a multitude of very valuable minerals, yet to all intents and purposes they do not exist, because nobody has gone out and proved they exist. Once you go out and prove they are there, then they do exist. The tradition has long been that, once they exist, a share, a relatively small share—two per cent or five per cent—of the value then goes to the government or the people as landowners. The minerals are there, they are dug up and they have become valuable; but they only become valuable once somebody has actually discovered them. Certainly nobody is going to go and discover them unless there is a profitable incentive to do so.

Senator HUTCHINS —We may not agree on this, but the government’s intention on these taxes is to increase investment in infrastructure, cut the company tax rate to 29 per cent, cut the immediate write-off to small business assets costing up to $5,000 and to boost Australian superannuation savings. In this tax, that is what the additional tax is going to go to; it is not going to go into a separate fund like they have in Norway or something like that. Dr Moran you might want to—

CHAIR —That was an editorial.

Senator HUTCHINS —I am asking for comment.

CHAIR —I have a question on the ownership.

Senator HUTCHINS —Your editorials are far more savage than mine.

Dr Moran —In response, I want to say, the government is not going to just throw the money away. Obviously it is going to use it for purposes it thinks are better than—

Senator HUTCHINS —Nation building.

CHAIR —No, getting themselves out of debt.

Dr Moran —In doing so you are saying: ‘Well, these people are wealthy; we’ll tax them more heavily. Those people, we will give a break to, because we will build infrastructure or whatever.’ But that itself is a distortion. There is a principle of government policy. I think you would agree generally that we ought to have as much neutrality as possible; we should not be distorting one decision versus another. Basically what you are saying to the mining industry is: ‘Well, they can afford it. There may be a bit less activity in these areas, but they can afford it. We will take it to pay the debt or give to superannuation or build infrastructure.’

CHAIR —You mentioned in your submission that on 27 May the Treasury Secretary, Ken Henry, commented that ‘it is a legitimate return to the owners, the people of Australia’. But the people of Australia are not the owners of the resource, are they? Under the Constitution the states are the owners, which is why the states charge royalties. That is right, isn’t it?

Dr Moran —Yes. There will obviously be a constitutional impasse if things go forward and some states feel they will be disadvantaged.

CHAIR —Though, as far as I am aware, not one single state has said it will abolish state royalties.

Dr Moran —Quite so. Presumably the government had some advice that it could do this, but the states certainly have advice that they cannot do it. You would end up with an impasse like the one in Canada that I discussed earlier, where the federal government had one set of taxes and the provincial governments had other sets of taxes. It became a contest to see who could raise the most and it crippled mining for a couple of years.

CHAIR —I do not think there is dispute between the Commonwealth and the states that the Commonwealth is not allowed to tax the property of the states. I also think there is no dispute that the resources are legally the property of the states. That is why they are structuring it as a profits based tax—because they are saying the Commonwealth can impose profits based taxes. But, given that it goes all the way back to the main gate now, when does a profits based tax become a royalty? How much profit do you make on a resource at the main gate before you have been able to transport it to a port?

Dr Moran —The answer is that the resource is worth very little at the main gate. The reason why the iron ore is so valuable is because those companies have taken the dirt and graded it et cetera and transported it extremely efficiently to the ports. Most minerals are worth very little at the mine site. Obviously, gold and diamonds are different.

CHAIR —This is one of the ironies that Andrew Forrest has put up. He says: ‘You aren’t prepared to take into account all the costs of infrastructure that I have had to put up. You just want to assess it over there. I’m going to be totally disadvantaged compared to some of my competitors in terms of the way the mineral resource rent tax is structured.’

Dr Moran —Any minerals or royalty tax really ought to be levied as close to the actual production as possible; otherwise, it is a discriminatory tax on a railway over there and not a railway somewhere else. Andrew Forrest definitely has a good point there.

CHAIR —Royalties are essentially the sale price for the resource. The states are selling the resource to the mining companies for them to add value and do whatever they want to do. That is right, isn’t it?

Dr Moran —The normal concept of a royalty is that you have found something and it is yours but the land is owned by someone other than you and therefore we will take a share of it. A justification at one stage was that there were some special provisions of defence and property rights which have to be clarified—there is a mining warden to be paid for et cetera—so there will be additional funds to be collected by the government.

CHAIR —Professor Garnaut essentially says that the states are competing with each other to attract investment, which is why they are not charging royalties that are high enough. That is his justification for suggesting that that is why the national government should take over and take all that away.

Dr Moran —I do not have any problem with the states competing against each other—

CHAIR —I think it is a good thing.

Dr Moran —So do I. But if they are competing down to the bottom we would take a look at it. There are a whole stack of reports by analysts—I have included them and you may have even more of them—that show the royalty rates in Australia, Mongolia, China, Chile and all over the world. Royalties here are not low; they are generally somewhat higher than in other countries.

Senator HUTCHINS —The Western Australian Premier was considering putting them up a while ago.

CHAIR —He has put them up.

Dr Moran —Yes, he has put them up. On the aggregate level of royalties, there are any number of analysts’ reports that coldly examine that and some of the tax regimes globally and demonstrate beyond any doubt that Australian royalty rates are not low.

CHAIR —As I understand it, if one state puts royalties up all it does is reduce the amount of GST revenue they get back through the Commonwealth Grants Commission—what they call horizontal fiscal equalisation, which is another impediment to states perhaps charging what might be considered a more appropriate level of royalties. Have you got a—

Dr Moran —The fiscal equalisation issues with the Commonwealth are long standing, and they do have an effect there, but nonetheless, Western Australia is a rich state compared to South Australia as a result of royalties and its mining activity generally.

I do not know whether the—

CHAIR —It is a big state, too.

Dr Moran —It is a big state, yes, and it is rich. Most states in Australia are quite well run, and it is quite well run. It has resources and it has a lot of taxation revenue from those.

CHAIR —It has got a good government, that is why.

Senator HUTCHINS —We won’t do any editorials!

Dr Moran —It has not always had that though, I think.

CHAIR —No, that is true!

Senator HUTCHINS —In the final pages of your submission, before you go into the carbon tax, you make a very clear comment—and I would just like you to comment on it—about native title covering 40 per cent of the continent and then you talk about national parks accounting for 7½ per cent of the land area of the continent.

Dr Moran —Yes.

Senator HUTCHINS —Is there any particular reason that you refer to that? Is it because you believe, say, that native title has gone too far? Or do you believe that we should be able to mine in national parks? Is there an IPA view?

Dr Moran —I do not think that mining in national parks is forbidden in Australia, is it? It was basically saying that over the years we have been less accommodating to mining than we once were. Native title has added a complication and there are lots of cases tied up with it. No company is going to go ahead and do something until those things are clarified. There is a cost involved in that.

If it is permitted to mine in national parks, it is much more difficult and there are some—

Senator HUTCHINS —There are many restrictions on national parks.

Dr Moran —Mining generally is quite compact. You find that a mine is a very small area and it is easy to excise. Mining in national parks is quite common around the world. It does not destroy the national park—

Senator HUTCHINS —But it is not as common here.

Dr Moran —It is not as common here, no.

Senator HUTCHINS —And the IPA would like to see a bit more access to the national parks?

Dr Moran —I do not see any reason why we would not have access to national parks for mining. Certainly, if somebody were to say, ‘Okay, we’d like to excise that 10 square kilometres but we’ll give another 10 square in return,’ I think that that would be a reasonable trade off.

Senator HUTCHINS —Do you have any information on who will pay the MRRT, geographically? Will it be mostly Western Australia, where many of the mines are located; Victoria, where many of the big mining companies have their headquarters; or overseas, where a large proportion of shareholders reside?

I do not know if you know that answer. If you would like to take that on notice and respond to us you are most welcome.

Dr Moran —I do not know the answer. I would say it is very unlikely to be Victoria. It seems as though it is much more likely to be where the mining is taking place. I do know it would not be the overseas people because they do not pay the tax. There is a world price—they pay the price.

Senator HUTCHINS —I just wonder if your organisation would be able to take that on notice and reply as soon as possible?

CHAIR —I have got a follow up question to this. The MRRT is supposed to be applied on a project-by-project basis, is it not?

Dr Moran —Yes.

CHAIR —How much iron ore production is there in Victoria or Queensland or New South Wales?

Senator HUTCHINS —Is that a rhetorical question?

CHAIR —It is a rhetorical question perhaps, but I am just following up on Senator Hutchins question. Is it not true that 98 per cent of iron ore production is in Western Australia?

Dr Moran —I do not know but it sounds about right, yes.

CHAIR —If 98 per cent of iron ore production is in Western Australia, how much of the tax on iron ore from the MRRT do you think would come from Western Australia?

Dr Moran —I would assume that. But I think Senator Hutchins is suggesting that it is coming from the companies themselves, located here.

CHAIR —But it is not. It is on a project-by-project basis, isn’t it? It is a tax on the resource, isn’t it?

Senator HUTCHINS —We might be able to ask Dr Henry.

—We will be meeting with Dr Henry on Monday and we will explore that with him further. They have been resisting answering that question. I will be interested to see whether Senator Hutchins will ask that same question of the Treasury secretary.

Senator HUTCHINS —I might be absent.

CHAIR —Dr Moran, thank you for you contribution to the committee. You made a very detailed submission, which we appreciate. We might want to talk to you about the carbon tax at a later stage.

 [10.17 am]