Benny on the mining super tax

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Speaking of economics… my almost resident economically minded friend Ben has kindly produced a three part series on the Mining Super Tax that everybody keeps banging on about in the news. If you’ve been wondering about the economics of the issue, then wonder no longer… all will become clear.

The Resource Super Profit Tax (RSPT) falls into the deepest pit of my taxation system interest. Much has been written about it by the mainstream papers, much of it oddly conflicting. The source documents of note can be found in here (pdf) and here.

At present, mining companies have to pay royalties, which are payments made to the states for taking their resources. Comparatively, the RSPT will tax profits, or more descriptively, will tax the value of the resource at the taxing point (which seems to be a derived value at the mine gate) less all allowable costs in getting the resource to the taxing point, such as exploration costs, mine/well development costs, processing and haulage costs. The stated intention of the RSPT is to collect an appropriate return for the community from private firms exploiting non-renewable resources, via implementing a taxation system that responds to changes in profits. Fair enough.

The mining companies have complained the tax is too high, and that it will stunt business investment, and thus impact on economic output (and therefore employment). The Government was of the opinion the RSPT will “remove impediments to mining investment and production…[and] encourage greater investment and employment in the resource sector”. At face value, the logic would be that higher taxation or decreased profits would reduce investment, however it is the intricacies of the tax that suggest this might not be the case.

The real intrigue about this tax is its application to company’s losses. Articles have thrown around the idea that it is a brown tax, which isn’t the case, though it is understandable why the comparison is being made. Similar to a person’s income tax, a company will be able to use any of its costs of the project as a type of tax deduction. Importantly, as most mining companies are likely to spend the bulk of a project’s costs during the initial phases when setting up a mining process, which will likely also be a period where they make little revenue or profits to offset their costs against, they will be able to carry their costs forward to be deducted as a loss against future income (or deduct them against profits made elsewhere if available). Due to the delay between accruing costs and receiving the credit, the cost offset will grow at the long term government bond rate. This is all fair enough.

However, controversy has stemmed from the initial announcement which suggests that the RSPT system provides that if the company never makes a profit to offset these costs against, they can simply get this amount payed out when they wind-up the project.

This effectively means that the Government will be funding project start-ups, and effectively taking on some of the risk of the project. For example, a new project might be to develop a coal mine at the cost of $1 billion. Ten years later, the coal mine may not have ever made any profits, so the Government may not have received any revenue from it, but will have to pay the company 40% of the $1 billion (grown at the long term government bond rate, so the $1 billion may have grown to $1.1 billion over the ten years). However, this potential cost to the government will be offset by potentially higher revenues from decent mining projects (which, in Queensland’s case, given the absolutely booming situation surrounding global coal demand and prices, will be a lot).