It was inevitable that BHP Billiton’s extraordinary interim profit performance would lead to calls for the Gillard government to rethink its proposed mineral resource rent tax given its proximity to federal Treasury’s release of the modelling of the MRRT and the abandoned resource super profits tax that preceded it.
With that modelling showing the MRRT would raise more than $60 billion less than the RSPT over its first decade, a $US14.5 billion half-yearly profit was almost provocative.
Bob Brown, predictably, accused the resource companies of “ripping” $60 billion from taxpayers’ pockets as a result of their successful campaign against the RSPT and negotiation of the MRRT ahead of last year’s federal election.
In reality, of course, that $60 billion was never in taxpayers’ pockets — if it ever did materialise, it would have belonged to the shareholders of the resource companies. It was money that would have been expropriated from them and diverted to the Commonwealth’s revenue base.
While there may be some justification for a tax on the windfall element of profits generated by the commodities boom it is also worth nothing that technically those resources belong to the states, not the Commonwealth or taxpayers generally.
The other problem with the notion that the Gillard government has “sacrificed” $60 billion of revenue by abandoning the RSPT is that it isn’t possible to know what the RSPT would actually have raised over a 10-year period.
Treasury can’t predict a budget outcome over a 12-month period with any precision so why would anyone believe that it could forecast the profitability of mining companies and the tax revenues that would generate a decade out? Commodity prices are notoriously volatile and unpredictable.
The structure of the two taxes does mean that the MRRT should produce less revenue than the RSPT would have — the effective tax rate is much lower, its coverage is far more limited and there are far more concessions within it.
However, if Treasury were to somehow get the numbers right the tax would still raise $38.5 billion of revenue over the decade — it would divert $38.5 billion from the shareholders in the big miners to Treasury’s coffers — that wouldn’t be raised without the tax. That is not insignificant.
There is another, critical, dimension to the debate on resources taxes.
Had the RSPT been introduced, whatever the level of future investment by the sector in expanding their Australian operations might have been it would certainly have been less than it will be under the MRRT.
It would have significantly reduced the net present value of prospective projects — the Olympic Dam expansion wouldn’t have been economic, for instance — and altered, unfavourably, the competitive relativities between Australian projects and the offshore options within all the major miners’ pipelines of potential projects.
On Wednesday, along with the bumper profit, BHP Billiton’s Marius Kloppers revealed BHP plans to spend $US80 billion on mainly expansion projects over the next five years.
While the program will include investments in Chile, to expand the Escondida copper mine, and Canada, to develop the Jansen potash project, the bulk of the $US80 billion will be spend expanding BHP Billiton’s Australia iron ore and coal mines and on the phased expansion of Olympic Dam.
That torrent of investment — and smaller but still very substantial investments by Rio Tinto, and Xstrata and the other miners, not to mentions the many tens of billions of dollars that will be poured into the multiple Queensland coal seam gas-to LNG export projects — will create jobs, a surge in export income and, with or without a new tax, a big increase in taxation and royalty income for the federal and state governments.
BHP Billiton, for instance, already pays more than 40 cents in the dollar of its Australian earnings in taxes and royalties. If the Australian earnings of the big miners surge because of the investment binge, so will taxes and royalties. The expanded Australian asset base will also, of course, generate increased profits, and dividends and capital growth for all those Australians who, directly or indirectly, have an interest in BHP Billiton shares.
Overlay the MRRT on the tide of investment in prospect and there is a very positive story for the economy, for government revenues and for shareholders.
The Gillard government has made it clear it isn’t going to do another backflip on mining taxes and renege on the pre-election deal negotiated with the miners. The Opposition would prefer there to be no new tax. It is therefore either the MRRT or the status quo.
Given the wave of investment the agreement on the MRRT has unleashed, the fate of the tax and the direct revenues raised by it is of far less consequence than the massive positive impacts of the abandoning of the punitive, investment-threatening RSPT.
*This first appeared on Business Spectator.