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3rd UPDATE: Australian Miners Step Up Tussle With Government Over New Tax
May 25,2010 10:56CST
industry news

MELBOURNE -(Dow Jones)- Australia's biggest mining companies Monday dramatically raised the stakes in the heated battle with the government over a planned new tax, warning the proposal had already damaged the nation's reputation and accusing the government of misrepresentations.
Rio Tinto Plc (RTP) Chief Executive Tom Albanese said the Australian government's planned Resources Super Profits Tax is the biggest sovereign risk issue the miner faces across its global portfolio of assets and would hurt investment in the industry.

Fellow mining giant BHP Billiton Ltd. (BHP.AU) attacked the government for what it said were misrepresentations about the tax rate it currently pays on its Australian operations.

Facing a weakened position in recent opinion polls ahead of an election expected later this year, the government defended the case for the tax in a rowdy session in Australia's parliament and Australian Treasurer Wayne Swan accused the mining industry of being "hysterical".

The escalating war of words makes any quick negotiation of a compromise on the new tax look unlikely.

Albanese reiterated that Rio Tinto is carrying out reviews of all of its planned capital investments in Australia in light of the planned tax, and said the proposal had damaged Australia's reputation as a place to invest.

"That damage has been done. Now it is in everyone's best interest to mitigate this if we can," he told reporters.

The RSPT would see companies taxed at a rate of 40% on profits above a rate of return in line with the long term government bond rate of about 6%.

In a detailed rebuttal of the case for the tax, Albanese refuted the government's allegation that miners aren't paying their fair share of taxes and dismissed its assertion that Australians have missed out on about A$35 billion in taxes from the industry over the past decade.

If the RSPT had been enacted a decade ago, Albanese said companies like Rio Tinto wouldn't have made the heavy capital investment in businesses like its iron ore operation in the Pilbara region of Western Australia state and the nation would be poorer as a result.

"If the tax had been in place 10 years ago, we wouldn't have made the investments, starting in 2004, that we did make in the Pilbara," he said.

"We wouldn't be producing today at 220 million (metric) tons a year. It would be a smaller business and that wouldn't have been good for Australia."

Australian Treasurer Wayne Swan said Monday mining companies were acting "hysterically" by exaggerating the amount they would pay under the proposed tax in a new advertising campaign launched Monday by industry lobby group Minerals Council of Australia.

"Miners have access to a range of generous deductions, which means that they are paying well below the official (corporate tax rate) of 30 cents in the dollar," Swan told the Australian Broadcasting Corp. radio.

Swan said the mining sector currently only pays between 13% and 17% corporate tax once deductions are taken into account, citing research by the National Bureau of Economic Research in the U.S.

"The government won't be swayed by a political campaign from the miners," Swan said in a statement to parliament.

"So I'd call on companies to engage properly in the consultation process."

BHP Billiton said Monday it was disappointed with what it claimed was a misrepresentation of the tax rate it pays in Australia by the government.

BHP Billiton Chief Financial Officer Alex Vanselow said the company paid A$6.3 billion in total taxes to Australian governments in the 2009 financial year, making its effective tax rate 43% in that year, and that its average tax rate between 2004 and 2009 was 42%.

"It concerns BHP Billiton that inappropriate conclusions appear to have been drawn from a study by two academics from a United States university," Vanselow said.

"A more accurate and meaningful method is to use the actual tax payments and returns submitted by companies in Australia."

A spokeswoman for BHP Billiton said the company's corporate tax rate in 2009 was 29% after deductions, and that when state-based royalties and the petroleum resource rent tax were added, its effective tax rate rose to 43%.

BHP said the 2009 earnings of its Australian operations were almost fully reinvested back into Australia in the form of taxes, royalties, capital applied to new projects and dividends to shareholders.

The Minerals Council said Australian Taxation Office data shows that the average corporate tax rate paid by the mining sector is 27.8% and that once state-based royalty charges are added to this, the effective tax rate paid by the sector rises to 41.3%.

Rio Tinto Comments Move Australian Dollar, BHP JV More Important Than Ever

Albanese's comments on the potential impact of the tax on investment in Australia's key mining sector briefly pushed down an Australian dollar already weakened by uncertainty over the outlook for commodity prices.

The Australian dollar fell as much as 1.2% to a low of US$0.8186 from US$0.8285 before recovering to US$0.8288 at 0542 GMT.

The mining boss said the Australian dollar was being hit harder than the currencies of other resource rich nations partly because of uncertainty over the tax.

"The Canadian dollar hasn't fallen anywhere near as hard as the Australian dollar," he said.

Rio Tinto is currently in the process of seeking approval from competition regulators for its planned Pilbara iron ore joint venture with BHP Billiton, which the pair believe will deliver synergies of more than US$10 billion.

While there has been speculation about Rio Tinto's commitment to the deal, Albanese said the miner remains determined to push it through and that the new tax bolsters the case for pursuing the synergies.

"If anything, an added impost like this proposal makes it even more important to get those synergies and find areas for cost reduction," he said.

One feature of the RSPT is a proposal for the government to take on 40% of the risk for mining projects, but Albanese questioned whether it was realistic to expect this to be honoured in a downturn when most mining companies would qualify for compensation right when the government needed its reserves most.

"I'm not sure that would be politically popular and I think as a financier or as an investor you would have to make an assessment that in that scenario you can't take that to the bank," he said.

Federal Resources Minister Martin Ferguson said Sunday there was room for compromise on elements of the tax, but the 40% rate wasn't negotiable. Ferguson didn't rule out changes to the "uplift rate"--the level of profits that will attract the additional tax.

BHP Billiton
mineral resources
mineral resources development
mining tax
Rio Tinto

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