Past efforts highlight tax change risk

THOSE who fail to heed the lessons of history are doomed to repeat them, so the saying goes.

Yet despite reams of overseas evidence pointing to the dangers of changing tax rules midstream, the Rudd federal government appears determined to push on with its proposed 40 per cent resources super profits tax.

Research by KPMG suggests the tax would lift the effective tax rate for iron ore miners from 43.6 per cent to 54.7 per cent, versus 40.2 per cent in Canada, 37.8 per cent in Brazil and 31.1 per cent in China.

According to international mining tax expert, Dr Balbir Bhasin, associate professor of International Business at Sacred Heart University in Connecticut, Australia need only look as far as Indonesia to see what it risks by pursuing its tax proposal.

In 1999, Indonesia finalised a new mining regime to replace its long-standing and well-understood Contracts of Work system.

The CoW system provided a clear fiscal and regulatory framework for miners, including guarantees that no further permits would be required, nor would a project be subject to any subsequent changes in government laws or policies once a CoW had been awarded.

In a major 2008 study, Dr Bhasin found that, after the changes were announced, not one single new CoW was issued in the ensuing eight years. Worse still, by the year 2000 only 12 of 286 existing CoWs continued to operate while an estimated 170 exploration projects had been suspended. Nonetheless, the new system was belatedly enacted in December 2008.

“Indonesia has never recovered after the scrapping of the CoW system,” Dr Bhasin told WA Business News.

“As Indonesia has discovered, investors seek security of tenure and regulation. The new Indonesian mining law ... does not provide for this, and as such it has not been effective in attracting international investment.

“So it is understandable that the (Australian) mining community is in a panic – retrospective application of tax legislation causes disharmony.

“This tax certainly makes Australia uncompetitive when compared with other regimes … so as more countries court investment in mining, it is bound to have negative effects on Australia.”

Zambia and Mongolia also have recent experience of the havoc such changes can wreak.

In Zambia, where copper mining accounts for 70 per cent of the nation’s earnings, the government imposed a windfall tax on copper production in early 2008.

The tax boosted the corporate tax rate from 25 to 30 per cent, raised the standard mining royalty rate five-fold, and imposed a ‘windfall’ tax of 25 per cent of profits generated from copper production above a base price of $US5,500 per tonne.

The move was an immediate disaster, leading to a virtual stop in all exploration activity and stalling mine investment, compounding the subsequent impact of the global financial crisis.

With its primary industry in tatters, the government scrapped the tax just nine months later.

Despite huge internal pressure to re-impose the tax as copper prices have risen, Zambian vice-president George Kunda categorically ruled out any such move last month because “we do not want to destroy the mining industry in the country”.

It was a similar story in Mongolia, which in 2006 decided to put a 68 per cent tax on copper production once prices passed $US2,600/tonne.

But the tax was repealed in August when it threatened to derail a number of projects, including Rio Tinto’s planned $US4 billion Oyu Tolgoi copper-gold mine.

Former Shell Africa chief Ann Pickard, who now heads Shell in Australia, last month noted her experience in Nigeria, where a revamped petroleum regime is due to be enacted in August.

“When they announced a new tax (regime) in Nigeria, investment stopped,” Ms Pickard said in Brisbane last month. “We all tend to stop when there is above-ground uncertainty.”

Africa’s biggest oil and gas producer already boasts one of the world’s most punitive tax regimes, with oil producers slugged at around 85 per cent of revenue.

But Nigeria’s new Petroleum Industry Bill will push the effective tax rate for oil and gas producers even higher, to a staggering 91 per cent.

Shell has already warned the Nigerian bill threatens projects worth $US50 billion, while several companies have flagged legal action against the Nigerian government.

The US has had its own windfall tax disaster, repealing its Crude Oil Windfall Profit Tax on domestic production after just eight years in 1988. The tax generated less than a fifth of the revenue expected and cut domestic output by up to 4.8 per cent.