Truth, lies and minerals tax: the RSPT debate deciphered
By Stephen Long
Updated Thu Jun 3, 2010 4:14pm AEST
It boils down to a question of whose case you prefer: that of the Treasury boss Ken Henry or that of the mining magnates and their lobby group. (AAP Image: Macarthur Coal)
Amid the spin, misinformation and hyperbole about the resources super profits tax (RSPT), one thing is not seriously in dispute: the profits that mining companies make from extracting Australia's natural resources have soared, and the return going to the public hasn't kept pace.
Once you accept that - as even the mining lobby does - it's hard to claim there isn't a case in public policy for increasing the price or charge that mining companies pay for the right to exploit a public endowment.
The minerals belong to the Australian people, born and unborn, and the people are entitled to a decent return.
The debate then becomes a question of design. What's the best way for government to impose a price on the use of the resources?
What's the most efficient and least economically harmful regime of charges or prices?
Here's where it gets tricky - and where there's a debate laced with vitriol about the merits and demerits of the resources super profits tax.
It boils down to a question of whose case you prefer: that of the Treasury boss Ken Henry or that of the mining magnates and their lobby group.
To understand the competing claims, you need to understand the resources super profits tax and how it works. Apologies in advance: it's a little complex, but stay with me.
The first thing to grasp is that, when it comes to new projects, the resources super profits tax is not in any meaningful sense a tax at all.
It's more akin to a joint venture partnership between the Commonwealth and private capital.
In effect, if the policy goes ahead as planned, the Government will take a 40 per cent stake in all future investments, receive 40 per cent of the profits, and bare 40 per cent of the risk.
Technically, it works like this.
* The Government will provide companies with a tax credit for 40 per cent of the project costs or project losses. That, in theory, gives the company a "risk free" investment and, in effect, gives the Government a de facto 40 per cent interest in every resources venture.
* The Government won't fund its contribution to the joint venture upfront. Instead, the project developers will, in effect, "lend" the Government its share of the investment - with a guarantee the Government will pay its share out of the profits or, if the project isn't successful, through a cash payment when the project is wound up.
* As a 40 per cent stakeholder, the Government will take 40 per cent of future profits - minus state mining royalties which it will reimburse and reduced by a notional interest charge paid to the company for financing its stake. Because that's a "riskless loan" (in practice there's no likelihood Australia will default or not pay its way) it argues that it should be paid at the long-term government bond rate, a proxy for the return on risk-free money.
* In turn, the Government reckons that resources companies should be able to secure project finance at the long-term government bond rate - because the Government is guaranteeing 40 per cent of the capital costs.
* The super profits tax - which is in effect the Government's profit share - kicks in only when the profits from the venture exceed the long-term bond rate.
Are you still with me?
You can see why the Government's had a hard task explaining the detail and the debate's deteriorated into spin and sledging.
Why go down this route?
In theory, the resources super profits tax is a better tax than the state mining royalties it will in effect replace.
They are a flat tax applied to the volume of resources extracted, regardless of the profit a company makes, while the RSPT only hits profitable ventures.
In theory, because the Government is taking on 40 per cent of the risk it should make new projects more viable and encourage investment.
In theory, it should lower the cost of capital for resources companies because they'd be funding the Government's 40 per cent share through debt (at a low rate) and debt is cheaper than equity (raising money by issuing shares).
The question is: does the theory hold in practice?
The mining companies argue no.
The big flaw in the theory, according to the Minerals Council and a report they commissioned from KPMG, is the assumption that companies can secure finance at the long-term bond rate.
They reckon this won't be possible - because contrary to the Government's assertion, its 40 per cent stake (via the tax credit) isn't "risk free".
The Minerals Council argues it is subject to "sovereign risk" though what it really means is policy risk - the risk that a future government could change the goal posts by changing the policy.
They also reckon that a government bond is a superior investment because it provides a more predictable return, it's well understood by financiers, and it has an established primary and secondary market.
In contrast, says the Minerals Council, there's no established market for the kind of finance the government scheme entails and no appetite in the markets for financing investment at the government bond rate (though KPMG concedes it might develop over time).
So why not just up the rate at which the tax kicks in - say to 2 or 3 per cent above the Government bond rate - to take into account those objections?
Enter Ken Henry. The Treasury boss is adamant that this should not and must not be done.
He reckons that it would create a massive economic distortion - and provide a huge opportunity for mining companies and "financial engineers" to make big money at taxpayers' expense.
How so? Well, say a Macquarie Bank or a Goldman Sachs decides that the Government's 40 per cent tax credit really is "risk free money". So they invest in mining projects, get paid interest at 7,8, 9 per cent for financing the Government's investment, and pocket the difference between that and the long-term bond rate (which is a tad under 6 per cent).
It would be money for nothing - what the investment bankers call an "arbitrage".
The same opportunities would be open to a Twiggy Forrest, a Clive Palmer, or the big multinationals such as BHP Billiton and Rio Tinto.
So are there other ways you could implement the resources super profits tax?
The answer is yes.
One option is that the Government could provide a bond to the resources companies to cover the cost of financing the tax credit, paying interest at the long-term government bond rate, rather than asking them to find the money from the capital markets.
The other is to drop the 40 per cent tax offset and change the RSPT into something more akin to the existing offshore petroleum rents tax. It kicks in at a profit rate of about 11 per cent, but with no tax offset.
But the campaign from the mining lobby wouldn't stop even if the Government altered the rate at which the tax kicks in.
The Minerals Council and the big mining companies don't want it to apply to existing projects.
They argue that this amounts to a "retrospective tax". That phrase amounts to a perversion of language.
It's like saying that Frank Lowy is applying a "retrospective" tax when Westfield puts up the rent for tenants of its shopping centres.
The RSPT is not a retrospective tax - it will only apply to future profits, and two years hence.
What the resources lobby means is that companies weren't necessarily anticipating the tax change when they invested in Australia.
They probably weren't anticipating the biggest mining boom in history either, fuelled by extraordinary demand from China.
Stephen Long is the ABC's Economics Correspondent. 
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