Dissenting report from the Australian Greens

Introduction

1.1        The Minerals Resource Rent Tax (MRRT) was intended to be a tax on the economic rents mining companies make from the extraction of certain non‑renewable mineral resources belonging to the Australian community. As the Greens have explained elsewhere[1], it is a pale shadow of the resources rent tax envisaged by the Henry Tax Review[2], due to the limited coverage, low rate and other poor design features which arose from ‘negotiating’ under duress the tax with the three largest mining companies after they ran a ferocious advertising campaign against the Rudd Government’s version of a mining tax.

1.2        As a result of the poor design features, and somewhat lower– but still high by historical standards ­– commodity prices, the MRRT only raised $0.1 billion in the first half of 2012-13[3], compared to a forecast for the full year of $2 billion in MYEFO, itself well below earlier estimates (see table below). Given that Fortescue Metals have said that they do not anticipate paying any MRRT in the next few years and BHP and Rio Tinto have reported deferred tax assets in recent financial statements, it appears that, notwithstanding they continue to make billions of dollars profits from mining in Australia, the large mining companies will not be paying much MRRT any time soon.

1.3        One of the most egregious flaws in the MRRT is the rebating of any future increases in state royalties, which allows the MRRT revenue to be further eroded by state governments. It is this aspect which the current bill from the Greens seeks to correct. The bill was introduced in the Senate on 12 September 2012 and into the House of Representatives on 11 February 2013. In essence it reprises the amendment to the MRRT bills moved by the Greens on 19 March 2012.

1.4        The bill amends section 60-25 of the Minerals Resource Rent Tax Act 2012 to provide that any increase in royalties after 1 July 2011 should be disregarded when calculating royalty credits for the MRRT. It is a first step towards ensuring that the mining sector makes a fair contribution to the society whose assets it consumes in generating its wealth.

MRRT revenue projections, $ billion

	Economic Statement 2010	FoI	MYEFO 2010-11	2011-12 Budget	MYEFO 2011-12	2012-13 Budget	MYEFO 2011-12
2012-13	4.0	4.0	3.3	3.7	3.7	3.0	2.0
2013-14	6.5	6.5	4.1	4.0	3.8	3.5	2.4
2014-15		6.5		3.4	3.1	3.2	2.1
2015-16		5.5				3.7	2.6
2016-17		4.0
2017-18		3.0
2018-19		3.0
2019-20		3.0
2020-21		3.0

Sources: 2010-11 Budget Paper No. 1, p 5-15; Economic Statement 2010, p 32; Treasury, Freedom of Information request, 14 Feb 2011; MYEFO 2010-11, p. 283;  2011-12 Budget Paper No. 1, pp 5‑35; MYEFO 2011-12, p 319; 2012-13 Budget Paper No. 1, pp 5‑29; MYEFO 2012-13, p 305. The numbers are the net contribution to revenue after allowing for the deductibility of MRRT lowering company tax collections.

The MRRT and royalties

1.5        Most economists believe that royalties are an inefficient tax unable to capture windfall gains while a resources rent tax is a very efficient tax.[4] This is why the Henry Tax Review recommended replacing royalties by a 40 per cent resources rent tax. The MRRT in its current form, however, rather than replacing royalties leaves them being paid but then rebates them. For companies not paying the MRRT in a given year any royalties paid that year can be carried forward at a generous ‘uplift rate’ of 7 per cent above the bond rate and deducted in future years.

1.6        While the Henry Tax Review recommended replacing royalties, it also considered, as a second-best option, crediting the companies for royalties paid. It was very clear, however, that if the latter option is adopted, 'the state royalty regimes would need to be fixed at a particular point in time to ensure that the Australian government does not automatically fund future increases in royalties'.[5]

1.7        Under the Rudd Government’s version of the mining tax, the Resources Super Profits Tax, 'the refundable credit will be available at least up to the amount of royalties imposed at the time of announcement, including scheduled increases and appropriate indexation factors'.[6]

1.8        The wording used in the heads of agreement between the new Gillard Government and big three mining companies said 'all state and territory royalties will be creditable...', leaving this issue unclear. Then Treasury head Dr Henry's interpretation was 'it is my understanding that there would be no credit provided under the MRRT for those future increases... it does not say ‘all future royalties’.[7]

1.9        After the 2010 election the Policy Transition Group (chaired by former BHP chair Don Argus and Resources Minister Martin Ferguson) was established to sort out technical details of the MRRT. It recommended 'all current and future state and territory royalties on coal and iron ore should be credited', which the Government accepted. The Group made a vague reference that governments 'should put in place arrangements to ensure that the states and territories do not have an incentive to increase royalties', but provided no detail on what form such arrangements might take. In its submission to this inquiry the Minerals Council reiterates this vague wording and adds the equally vague statement that:

...the minerals industry supports constructive dialogue between Commonwealth and State and Territory governments in support of stable and internationally-competitive taxation and royalty arrangements.[8]

1.10      The Western Australian, New South Wales, Queensland, South Australian and Tasmanian governments have subsequently announced royalty increases. Under the terms of its current policy the Gillard Government will have to refund these additional royalty payments to the companies paying them.

1.11      It is clearly intolerable to allow the states to erode the revenue of the MRRT in this way. They have effectively been given a "blank cheque" to keep raising royalties knowing that the Australian government rather than mining companies will effectively meet the cost. Independent experts have been critical of this provision. For example,  the OECD recommended 'royalties should also be eliminated, rather than credited to MRRT payers by the federal government, to simplify the tax system and remove states’ incentives to raise royalty rates further, with counterproductive effects'.[9]

1.12      The Senate Economics Legislation Committee, in examining the MRRT bills, expressed their view that:

Moves by some states to increase royalties have the potential to undermine the superannuation and taxation reforms the MRRT is intended to support. The committee sees the announced increases as opportunistic, made in the knowledge that, long-term, the miners will be compensated for the increased royalties under the design of the MRRT.[10]

1.13      Even conservative economic commentators concede this point:

The tax invites state governments to increase royalty rates, thus exacerbating any inefficiencies those royalties cause...[11]

1.14      The Government has threatened to cut grants to states which increase royalties after July 2011 but this may prove politically difficult. This threat may, moreover, be circumvented by the Commonwealth Grants Commission's principles of horizontal fiscal equalisation. A state receiving a smaller grant would have less financial capacity and so would receive a larger share of the GST revenue allocated between the states.

1.15      The Government added this problem to the terms of reference for the GST Distribution Review conducted by Nick Greiner, John Brumby and Bruce Carter.[12]  The Review members agreed with the Greens, finding that ‘the Commonwealth’s decision to fully credit State royalties under the MRRT and PRRT has created an incentive for States to increase these royalties. This situation is neither desirable nor sustainable’.[13] While the Review members’ preference is for the problem to be sorted out by negotiation between the Australian and state governments, they recognise this would not be easy, and find ‘if the Commonwealth and the States are unwilling or unable to reach an accommodation regarding resource charging, the Commonwealth should amend the design of the MRRT and PRRT to remove the open-ended crediting of all royalties imposed by the States’.[14]

1.16      The Greens’ bill would achieve this.

PBO costing

1.17      The Greens have had the proposal in the bill costed by the Parliamentary Budget Office. The PBO estimated that limiting the royalties that could be credited to those in place at 1 July 2011 would mean the MRRT would raise an additional $200 million in 2012-13, $500 million in 2013-14, $700 million in 2014-15 and $800 million in 2015-16, a total of $2.2 billion over the forward estimates.

1.18      This costing assumes the other parameters of the MRRT are unchanged. If other design features are also improved, the revenue from limiting the rebating of royalties would rise.

Arguments made in the submissions

1.19      The majority report comments that only one submission supported the bill. It would be equally valid to say that half the submissions from those without vested interests, that is the mining industry or state governments, supported the bill with the other half also acknowledging there was a problem that needs to be addressed.[15]

Is mining overtaxed?

1.20      The Minerals Council’s submission contains its usual overstatements of the economic benefits of the mining industry, asserting vast employment multipliers and ignoring the adverse impacts mining has on many other parts of the economy. They complain of the costs the industry itself has driven up. There are also factual errors.[16]

1.21      The submission also claims that ‘even before the introduction of the MRRT, coal and iron ore were among the highest taxed industries in Australia’.[17] With reference to company tax, this is a disingenuous statement. While the three largest mining companies are very large companies and like the big banks and the big retailers pay quite large amounts of company tax in absolute dollar terms,[18] more relevant is what they pay relative to the size of their profits. The Treasury Secretary has observed:

Mining companies account for about a fifth of gross operating surplus, yet only around a tenth of company tax receipts...[19]

1.22      His predecessor remarked:

...the tax paid by the mining sector of the economy is a relatively small proportion of profit.[20] 

1.23      Two studies by Treasury economists examined alternative measures of average company tax rates by industry, which consistently showed mining as below average.[21] 

1.24      The Minerals Council tries to get a large number by including royalties as a tax even though they are the cost they pay the Australian people for what they sell. But even then, the combined company tax and royalty rate has fallen markedly.[22]

1.25      Even some mining company executives concede the sector should be making a larger contribution:

In April 2010, before the RSPT was announced, I am on the record as having said...those [mining] companies who are making a really high profit actually could afford to pay more tax and that they should.[23]

1.26      There is therefore no valid basis for the Minerals Council’s assertion that the bill should be rejected as it:

...runs directly counter to the policy objectives of limiting the overall tax burden on coal and iron ore mining industries.[24]

1.27      Even were it true that mining was heavily taxed, the Greens maintain it is actually in the national interest to extract fair taxation from the mining industry.

The impact of higher taxes on the mining industry and the economy

1.28      The Minerals Council also asserts that the bill should be rejected because it would:

impose higher tax burdens on coal and iron ore projects in Australia, threatening jobs and investment in an already difficult economic environment.[25]

1.29      The Association of Mining and Exploration Companies considers:

The Bill will not reduce the incentive for state and territory governments to increase their royalty rates...[leading to] potential job losses.[26]

1.30      To the extent the bill increases Australian government revenue, it creates scope for new jobs to be created in other industries from tax cuts or increases in government spending. Given that mining is the most capital-intensive and least labour-intensive industry, shifting the tax burden from other industries towards it should increase the number of jobs in the community.

1.31      The mining industries’ submissions overstate the sensitivity of investors to small changes in net returns. There is no indication that the prospect of the MRRT, which in one form or another has been discussed publicly for at least three years, is proving any significant deterrent to mining companies increasing their operations in Australia. The latest data show that mining investment in Australia reached another record high in the September quarter of 2012 and the industry estimates that investment in 2012-13 will be the highest annual figure on record.

Capital expenditure by the mining industry

Source: Australian Bureau of Statistics, Private New Capital Expenditure and Expected Expenditure, September 2012, p 6.

1.32      Even if the MRRT were to deter a mining company from undertaking a project in Australia, there are plenty of rival firms who would be keen to enter:

...there are any number of willing investors in the Australian mining industry that are willing to invest on the basis of making good profits rather than super profits. Chinese and Indian investors in particular are falling over themselves to invest in Australia. Even various American mining companies are keen to invest in Australia, despite their difficulties back home.[27]

1.33      A good point about the balance of risks in setting tax rates on mining has been made by Fortescue:

...projects that are deterred by the effect of being required to make royalty payments do not result in the resource being lost or deteriorating in any way – the resources remains in the ground...[28]

Fiscal equalisation

1.34      Professor John Quiggin’s submission supports the bill. It focuses on fairness between states, observing:

A situation where the governments of mineral-rich states can gain revenue at the expense of the Commonwealth, and therefore ultimately at the expense of other states is antithetical to the principles of fiscal equalization.[29]

1.35      Professor Quiggin notes that the introduction of fiscal equalisation was:

...in part, a response to dissatisfaction with existing arrangements among residents of Western Australia, reflected in the passage of a referendum advocating secession from the Commonwealth.[30]

1.36      He observes that:

Historically, fiscal equalization has worked to the benefit of WA and Queensland, offsetting the high costs of providing services to a sparsely distributed population.[31]

The bill and the Government’s agreement with the major miners

1.37      The Minerals Council says that the bill:

would overturn the Australian Government’s July 2010 agreement on the MRRT and its March 2011 decision to accept all recommendations of the PTG.[32]

1.38      The Queensland Treasurer claims the bill would ‘make a bad tax worse’ as it means that:  

the Australian Government renege on the agreement it struck with the major mining companies.[33]

1.39      However it is not for the mining corporations to make the laws of Australia but the parliament and this bill presents the parliament with the opportunity to fix a fundamental flaw in the MRRT in the national interest, and not continue to pander to the interests of the mining industry.

States’ rights

1.40      Concerns were raised about the implications of the bill for states’ rights. The Western Australian government did not make a formal submission[34] but wrote to the Committee opposing the bill on the grounds that it effectively sought to ‘prevent’ increase in royalties and so ‘would further undermine states’ sovereignty and flexibility to achieve fairer returns to their communities’.[35] Similarly the NSW Government says the bill ‘would impinge on the rights of the states to impose royalties’.[36]

1.41      This argument is wrong. The bill does not prevent states raising royalties. It just ensures that if they do so, the royalties are effectively paid by the mining companies rather than being effectively paid by the Australian government. It is in no way an infringement of the constitutional position of the states.

Retrospectivity

1.42      The bill will apply to the first year that the MRRT is collected, namely 2012‑13. The Senate Standing Committee for the Scrutiny of Bills was concerned the bill may therefore ‘be considered to have a retrospective application’.[37] The issue of retrospectivity was also raised in submissions from AMEC and the NSW Government.[38]

1.43      It would certainly have been better to have fixed the problem with the MRRT before the start of this financial year, as the Greens sought to do with our March 2012 amendments. But now the choice is between two less desirable alternatives; an element of retrospectivity or foregoing around $200 million in revenue. Faced with this choice, the Greens prefer the former.

Conclusion

1.44      Having examined all the arguments made in the submissions and elsewhere, it is clear that the bill effectively addresses one of the deficiencies of the MRRT, namely the ‘blank cheque’ provided to the states. It would be a first step towards restoring the mining tax to an instrument capable of achieving the goal the Government claims for it, namely ensuring that the benefits of the mining boom are more equitably distributed across the people who own the minerals.

Recommendation 1

1.45      That the Senate pass the bill.

 

Senator Christine Milne
Australian Greens

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