The Political Economy of Australia’s Proposed Resource Rent Taxation Scheme Hope Ashiabor Moira Saccasan

Australia’s Mining Sector  In the Australia world rank (production) for iron ore was 3 rd, black coal was 4 th, and for liquefied natural gas was 5 th. It is the world’s largest exporter of alumina, black coal, iron ore, lead and zinc.  In , resource exports (minerals and petroleum) accounted for 49% of total goods and services exports, produced over 8% of GDP and 63% of merchandise export earnings.

An Australian iron ore mine

 It has a life of about 30 years at the current rate of extraction.  It is one of Australia’s resources.  Using our current accounting standards, it has a measurable value of some magnitude.  What will its value be at the end of the 30 years?

An Australian iron ore mine At the end of 30 years it will just be a very big hole in the ground. What will its value be? Using our current accounting standards, it will not have any value. It is in the desert, and cannot be used for farming. It is the inheritance of the next generation.

The Brundtland report  (We are)….. “drawing too heavily and too quickly, on already overdrawn environmental resource accounts to be affordable far into the future without bankrupting those accounts.”  “We borrow environmental capital from future generations with no intention or prospect of repaying”

Legacies for Future Generations

Contemporary Challenges  The pent-up demand for non renewable mineral resources has created boom conditions for industries in the mining sectors.  How are resource exporting countries going to ensure that overall economies and future generations reap the dividends of these windfall profits?

Royalty Arrangements  Rents from the extraction of non-renewable resources are typically collected as royalties.  By virtue of its federal constitutional structure, the collection of royalties has historically been a matter within the jurisdictional competence of the States.  Information from Australian Treasury estimates shows:

Royalty Arrangements (a)Mineral profits before tax and royalties are measured using income less an allowance for corporate capital. Source: Australian Treasury estimates

The Review into Australia’s Future Tax System  (The Henry Review) – set up on 13 May 2008  Mandate:  To undertake a comprehensive review into Australia's tax system  To propose the framework of a robust tax structure to enable Australia to deal with the social, economic and environmental challenges of the 21st century.  Scope:  Review federal and State taxes, (except the GST), and interactions with the transfer system.

The Review into Australia’s Future Tax System  December 2009: the Review Panel delivered its final report to the Treasurer.  One of its recommendations was that the existing framework for the taxation of resources should be reformed as it was inefficient.  That resources be subject to a rent based tax with an allowance for corporate capital.  2 May 2010: the Government released the final report and indicated its initial response to it.

Resources Super Profits Tax  Announced on 2 May 2010, one week before the Federal budget.  Levied at 40% on the realised value of resource deposits.  Allowance rate set at 10 year government bond rate for carry forward losses.  Would apply to all mining and petroleum projects, except Petroleum Resource Rent Tax (PRRT) projects.  Brown coal was to be further considered.

Resources Super Profits Tax How would the revenues be used?  One third to directly assist resources sector with a Resource State Infrastructure fund.  One third to promote growth across the economy addressing the risk of “two speed economy”. Cutting company tax rate to 28%.  One third for superannuation measures - saving for the future.

Stakeholder Responses - the Mining Sector  Cried foul – alleging there was no prior consultation with the sector in the lead up to the announcement.  Government convened a consultation panel to coincide with its announcement of the RSPT.  Miners hit back with a $100m advertising campaign against the proposed tax in the lead up to the Federal election (which was just a few weeks away).

Stakeholder Responses - the Union Movement  The Australian Council of Trade Unions endorsed the tax indicating that it would boost the economy and create jobs. They recommended further negotiations and discussion with industry.  A debate was organised between the secretary of the Australian Workers Union and the chairman of a large mining company “Resource Super Profits Tax – policy reform or tax grab?”

Stakeholder Responses - Government & the General Public The Government refused to:  negotiate the 40% rate of the tax  move from the uplift factor of the 10 year government bond rate. Started its own media campaign. A confused public was evenly divided on the issue:  some believing that it would cause a loss of jobs;  others believing the mining sector was trying to escape paying its way.

Removal of Prime Minister  On 24 June 2010 the Prime Minister, Kevin Rudd was removed from office and replaced by his Deputy, Julia Gillard, who immediately called a truce with the mining companies.  The advertising campaigns were halted while further negotiations took place with representatives from BHP, Rio Tinto and Xstrata mining companies.

Minerals Resource Rent Tax  On 2 July 2010, the MRRT was announced. It will apply only to mined iron ore and coal.  All other minerals are excluded.  The Petroleum Resources Rent Tax was to be extended to all Australian onshore and offshore oil and gas projects.  Tax rate is 30%, uplift factor for losses is long term bond rate plus 7%.

Minerals Resource Rent Tax  Small and mid tier mining groups were excluded from the MRRT negotiations:  Were dissatisfied with the outcome;  Argued that the tax would have a much more adverse impact on them than on the larger miners.  3 August 2010: the Policy Transition Group (PTG) was set up to look into their concerns.

Minerals Resource Rent Tax  The MRRT froze the rate at which royalties would be deductible to those rates in place on 2 May  The negotiations did not resolve issues relating to royalties paid to the States.  Some States resorted to opportunistic increases in their royalty regimes.  The three major mining companies involved in the MRRT negotiations have threatened to resume their anti-government advertising campaign, to force government to concede to their demands.

Lessons and Implications for the Introduction of Environmental Taxes

Questions for Reflection  Where resource rent tax regimes have been successfully implemented, (Canada, Norway) how were they introduced?  How did the extractive resource industries in those countries respond to the new regime?  To what extent have revenues from resource rents been used to address intergenerational equity and sustainability issues in other jurisdictions?