As Houses and Holes pointed out yesterday, the Minerals Council of Australia (MCA) public relations machine is hastily filling the mainstream media vessel with its store of positively framed economic analysis.
The latest analysis from the stockpile is a study undertaken by Deloitte Access Economics (DAE) which surveys Australian mining companies about their tax obligations in order to develop a counter argument for the following claim raised by Treasurer Wayne Swann in his 9th May 2010 Treasurer’s Economic Note (which was surprisingly worth reading)
…the amount the Australian community charges mining companies for our non-renewable resources has fallen from one dollar in three of profit for the first half of the decade, down to one dollar in seven today.
But Swann went a little further into detail than that.
Several stakeholders have responded that this excludes company tax. This is correct. The statistic covers how much the Australian community charges for its non-renewable resources. All companies in Australia pay company tax on their profits. But just because they pay company tax does not mean that Australia should give them our non-renewable resources for no charge. We don’t normally give companies land for free, just because they pay company tax. So it is not correct to argue that Australia should undercharge any company for our non-renewable resource wealth.
However, even if we include company tax, the point holds. The amount the Australian community charges for its non-renewable resources has halved, as a share of profits, compared to about ten years ago. And the amount the Australian community receive in both taxes and charges for our non-renewable resources has also halved.
In sum, the Treasurer’s point is that State royalties from mining have fallen as a share of profits of mining companies. That makes intuitive sense when you note that massive price increases in our key energy and minerals exports, and the fact that royalties are usually a fixed percentage fee on the contract price (or an inclining block fee in the case of Queensland coal). So if a mining company has invested based on an estimated coal price of $100/tonne, and they can now charge $150/tonne, the royalty payable goes from $7 to $12/tonne in Queensland, but profits might rise from $25/tonne to $60/tonne. Hence, the royalties as a share of profit decline from 28% of profits to 20% of profits. It is this observation that is at the heart of the resource rent tax debate of the past two years. What surpises me is that the States haven’t also use this observation as an excuse to raise their royalty rates (especially in Queensland where the State budget is looking very shaky – although they have incrementally raised royalty rates over the past decade and NSW announced today it intends to do so as well).
Why this is even a major public debate I am not sure. No doubt both Treasury and the MCA have been misleading in their analysis (a good discussion here), but the fundamental facts are the same. All companies pay roughly the same tax rate on profits, and mining companies pay an addition royalty fee to ‘buy’ the minerals from the State.
(Although in many US States the freehold landowner also owns the rights to the minerals, which is why The Beverley Hillbillies could exist there but not here. It also explains why the land access issue being faced by coal seam gas drillers aren’t prevalent there either, since the land owner is getting a cut of the revenue.)
The cyclical nature of the key minerals and energy commodity prices means that when prices are high royalties fall as a percentage of profit, and when prices are low, royalites increase as a percentage of profits. This is why the original Resource Super Profits Tax provided a symmetrical profit sharing mechanism that allowed the government to also share the cyclical downturns in revenue and potential losses.
So what was the result of DAE’s survey and analysis? Nothing as far as I can tell. They surveyed 21 large minerals companies, which produce about 70% of the national total of coal, iron ore and ‘other metals’, about their profits for the 2007-08, 2008-09 and 2009-2010 financial years. Which is surprising because the whole point of the study was to discredit Wayne Swann’s claims about changes over the past decade.
Tha basic finding is that mining companies pay taxes at the required corporate rate. Secondary to this is that if you redefine the measure used, you get a slightly different result for the proportion of taxes paid as a share of profits in the 2008-09 year from the one Wayne Swann presented. But since Treasury compared the period 1999-2003 with the 2008-09 year, we see nothing of the change in these rates over time. But of course not – because the trend over this time MUST have fallen due to commodity price gains as we have just discussed.
The only original finding I can see is that:
…a combination of falling profits and rising statutory rates for royalities meant that the resource taxes rose as a share of taxable profits of Australia’s mining sector in 2009-2010.
Which, as was noted above, is exactly how these measures intereact through the cycle.
Like all good economic ‘gun for hire’ reports for lobby groups, there are some standout quotes showing genuine misunderstanding. For instance –
Application of company tax to the resource sector has acted as a defacto resource rent tax.
Which makes no sense at all. It is the equivalent of saying that because a developer will pay company tax on their profits it not necessary to put a price on a block of land being sold by the government to the private sector (remembering that land prices are capitalised rents). Government should give land to private developers for free according to the logic of DAE.
The use of the term royalties tax-take which I assume simply means royalties is also pleasing to see. A fine public relations effort there.
In all, the DAE report is a six-page report that fails to answer it the question it repeatedly explains it aims to. How much did it cost the MCA? My guess is about $25,000. How much is it worth to the MCA as another independent reference point in the stockpile to counter the government economic arguments in future public debates? Priceless.